If you’ve decided to explore the world of self-employment as a freelancer, gig worker, or small business owner, the creative freedom of owning your own business often outweighs the financial stability of working for an employer. Yet when you leave the shelter of working for someone else, you become responsible for your personal finance and replacing benefits, ranging from health savings account, dental, and vision to retirement savings accounts and life insurance.
Securing medical coverage and saving for retirement is often top of mind as you transition to self-employment, but getting an individual life insurance policy can get lost in the shuffle. And it turns out that many workers rely on their workplaces for life insurance coverage. LIMRA’s 2022 Life Insurance Barometer study reported that 23% of respondents had life insurance coverage only through their workplace. That means nearly a quarter of potential workers moving to self-employment could lose financial security for loved ones when they leave their full-time jobs.
The good news is that you can buy self-employed life insurance to ensure loved ones will be taken care of if the unexpected happens. But where do you begin? We’ll help you understand why you need life insurance as an independent worker, how to buy life insurance on a flexible income, and how to choose the right plan for you. We’ll also help answer a commonly asked question, “Is life insurance tax deductible for self-employed individuals and small business owners?”
Do self-employed workers need life insurance?
Self-employed workers need life insurance just as much as full-time professionals. While life insurance isn’t a legal requirement, there are several reasons why you should have it, including:
- Replacing income: One of the main reasons to have life insurance is to support your family’s quality of life if you pass away. If the money you make as a contractor supports your family’s income, loved ones will need to replace that money if you’re no longer around to work.
- Taking care of a small business loan: The death benefit payment from a life insurance policy could help your family or business partner pay off any business-related debts. If you have a permanent life insurance policy that’s accruing cash value, you may also be able to borrow against the policy and use the money toward business expenses.
- Repaying debt: Whether you have a mortgage, credit card, or other debt, your loved ones can use the money from a life insurance policy to cover debt payments in your absence. Having a life insurance plan in place could be the difference between your family being able to remain in your home or suddenly having to find somewhere else to live.
Besides life insurance, self-employed workers are also advised to have health insurance and a retirement fund, to match the benefits of full-time employment.
Types of life insurance for the self-employed
There are two main life insurance options for independent contractors, term life insurance and permanent life insurance.
Term life insurance
Term life insurance lasts for a specific period, often between 10 and 30 years, and is the quickest and most affordable life insurance option for flexible workers. Fidelity Life’s RAPIDecision® Life policies make securing a term life policy convenient and fast. You can apply at home either online or over the phone, and coverage often starts the same day. You’ll also have six months to complete your medical exam if required, so you can schedule the exam whenever it’s most convenient for you.
If you’re new to self-employment, you may have significantly lower take-home pay for a period as you adjust. But that doesn’t mean your family doesn’t need income replacement and financial security if something happens to you. A RAPIDecision® Life policy uses non-medical underwriting to guarantee you can get coverage in place quickly. Then, as your business and income grow, you can adjust coverage to a higher level as needed.
Pros:
- Term life insurance is generally a much more affordable option because the premiums are much lower than whole life insurance.
- This insurance type is straightforward because it provides pure death benefit protection without any investment components.
- You can choose the years you want to cover your dependents, ranging from 10 to 30 years.
- Many term policies offer the option to convert to permanent life insurance without requiring a medical exam.
Cons:
- Coverage is limited to a specific term, and if the insured outlives the policy, there is no death benefit paid out.
- Life insurance premiums increase significantly upon renewal after the initial term expires.
- Term policies do not have an investment or savings component so they don’t accumulate a cash value.
Permanent life insurance
Term life insurance is often a smart choice if you have financial obligations for a set period, like a mortgage with 20 years left or young kids you’re planning to send to college. But permanent life insurance lasts a lifetime, meaning it could make sense if your financial situation is a bit more uncertain. And if you’re a freelancer or gig worker, financial uncertainty is part of the job description.
For older adults deciding to explore self-employment, a senior whole life insurance policy can provide peace of mind while also building cash value. Because permanent life insurance builds cash value over time, it’s generally more expensive than term life insurance. Yet, you can access the tax-deferred savings while you’re alive. That means you can borrow against this cash value and use the money for any reason, whether that’s to supplement your self-employed income or pay off debt.
Pros:
- As long as you pay the life insurance premiums, this insurance covers you for your entire lifetime.
- Policies accumulate cash over time, which you can access via loans or withdrawals for various needs like paying for expenses like health coverage and social security payments.
- Cash growth within the policy is tax-deferred, meaning there’s no tax deduction on the earnings until you withdraw them.
Cons:
- The life insurance premiums for this coverage are typically higher than term life.
- Permanent life coverage can be complex, with various options and features that require careful consideration and understanding.
Term life vs permanent life
Term Life Insurance | Permanent Life Insurance | |
Duration | Provides coverage for a fixed term (e.g., 10, 20, or 30 years). | Provides coverage for the insured’s entire lifetime. |
Cash Value | No. | Yes. |
Death Benefit | Paid only if the insured dies within the term. | Guaranteed death benefit. |
Investment Component | No. | Yes. Includes a savings or investment component that builds cash. |
Renewability | Renewable at the end of the term, often with higher premiums. | Permanent coverage; no need for renewal. |
Loans and Withdrawals | Not applicable. | Policyholders can borrow against the cash value or make withdrawals. |