Life Insurance When You’re Self-Employed

Being self-employed comes with a lot of perks. Freedom to control your career path, greater flexibility over your work rhythms and hours and if your boss is acting like a jerk, well—you have only yourself to blame. Working for yourself can take various forms, from freelancing at home to driving orders to customers to running a brick-and-mortar business.

When your business as well as your family depends on you, you might have some extra questions and considerations as you look into life insurance coverage. There are several ways you can structure your coverage to protect the people who depend on you and the work you love.

Business Considerations for Life Insurance

Generally, most people get life insurance coverage to offer a form of financial security for their family. But if you’re self-employed, you may have some additional business concerns to plan for, as well.

Business property and debt

Some common business loans, such as SBA loans, won’t go away after you die. The money you owe may need to come out of your estate, which can significantly impact what you leave to loved ones and make executing your will more complicated.

Self-employed freelancers may not have much business property to worry about (e.g., a freelance writer’s laptop won’t create a financial burden). But small business owners with expensive inventory or a storefront with a lease or mortgage may need extra insurance coverage to pay essential expenses while loved ones or business partners figure out their next steps.

Extra coverage is also essential if you’ve financially intertwined your business and home finances. If you’ve backed business debts with personal assets, or you have a second mortgage on your home, you will likely want ample life insurance coverage in place to protect your family.

Succession planning

Your business may be a meaningful part of the legacy you leave behind. Planning to leave the company you built in good hands is not only responsible, it may be emotional, too.

If you went into business with a co-owner, they may struggle to keep the doors open without you. A life insurance benefit can help offset lost profits and keep daily operations running more easily while your business partner makes arrangements to cover your contributions. It will take time and resources to find and train someone to step into your shoes, so having funds on hand can make these transitions a little easier.

Stress-free business sale

There isn’t always a clear next step for the business. Life insurance coverage can help give your family time to decide whether to keep the business’s doors open, close permanently or sell the business. Financial resources from a death benefit can help people pay applicable taxes, consult with legal or financial professionals or keep the business afloat while they search for a buyer to take over.

Types of Life Insurance for Self-Employed Workers

A few kinds of life insurance can be a good fit, depending on your needs.

Term life

Term life insurance is inexpensive compared to other policy types for the same coverage. You can also choose a term length to align with your retirement plans. If you’re looking for convenient, affordable coverage, this can be a great fit.

Whole or permanent life insurance

Some people prefer a lifelong coverage option, although this comes with higher premiums. Whole life and other forms of permanent life insurance accumulate cash value, which can be appealing because you can withdraw or take loans against that value while you are still alive. Note that withdrawing or taking loans against your cash value can reduce the death benefit for your loved ones, and could potentially come with fees or cause your policy to lapse if you don’t repay the amount.

Key person insurance

Some insurance companies sell life insurance to cover “key employees” whose knowledge and skills make them especially critical to a business’ success. Rather than determining how much life insurance you need based on a multiple of that person’s salary or factoring in their financial plans and debts, key person insurance may base coverage amounts on the profits a person contributes to the business and the expense it would take to hire and train a replacement. Key person insurance can be available as either a term or permanent policy. Typically, the company purchases the policy and is the beneficiary.

Accelerated death benefit rider

You can add various types of riders to a conventional policy to add coverage for specific scenarios. Self-employed people might be interested in considering accelerated death benefits (also known as “living benefit” rider).

Generally, the reason people get life insurance is so their chosen beneficiary can claim the death benefit after they die. Accelerated death benefit riders may allow you to claim and use some of the death benefit yourself, while you’re still alive. Variations could include a long-term care, terminal illness or chronic illness rider. This may be of particular interest to self-employed folks as a complement to health insurance, especially if they have to design their own benefits packages.

How Much Coverage Do Self-Employed People Need?

A common life insurance rule of thumb is to aim for 10 times your annual income in coverage. But this isn’t such a simple rule to follow if your income varies widely or you’re in the early stages of launching a business and don’t know what a typical year’s income will look like as you scale. If your income varies, you might calculate a baseline by averaging your income from the last five years.

It can also be helpful to find out how much life insurance coverage you need based on your financial goals and debts, rather than a particular salary multiple. Besides considering your personal goals and debts (e.g., mortgage, college), you can estimate the costs to keep the business operating, protect your business partner, replace lost profits and pay outstanding business debts.

Insurers typically ask for financial information as part of the life insurance application process. They may have additional questions if, for example, you operated a business that failed in the past or have more complicated finances as a business owner.

Some people may prefer to keep their work and home life separate and purchase separate policies—one to cover their family, and one to cover their business. Or, you might find it more convenient to have one policy to manage (maybe you run a family business, so work and home overlap anyway). Either way, set up coverage amounts and beneficiary designations carefully so everyone can claim the amount they need. Consider talking with a professional to spot any potential complications or overlap between personal and business obligations.

Is Life Insurance a Deductible Business Expense?

If you purchase a separate life insurance policy solely to cover your company’s expenses and protect your business partner, does this qualify as a business expense you can deduct?

Unfortunately, life insurance generally doesn’t count as a deductible business expense if the company is “directly or indirectly” a beneficiary. So even if you buy separate policies in order to avoid mixing work and personal coverage, you’re likely not going to be able to deduct those premiums if you, your spouse, your business partner or the company itself is the beneficiary.

You might be able to deduct some group life premium expenses when your employees are the beneficiaries. Consult a small business attorney to learn details about when you can deduct life insurance expenses.

It’s worth noting, however, that a death benefit isn’t included in taxable income, so your business partner can put the money from your policy straight into the business.

Life insurance can be especially important when you’re self-employed because your business obligations can create challenges for your estate if you don’t have plans in place. Figure out coverage that fits your plans so you can preserve or transition your business and protect both your work partners and family.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards. This article has been reviewed and approved by a compliance professional who is a licensed life insurance agent.

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