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.
Explore life insurance for seniors
There are a range of affordable Fidelity Life products to choose from based on your situation and financial responsibilities.
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. |
How much life insurance should you have when self-employed?
The first question that most self-employed people face when looking for a standalone life insurance policy is how much coverage to get. A good rule of thumb is to aim for 7 to 10 times your yearly net income, but this can be challenging to estimate if you’re brand new to self-employment. It may help to review salaries for others in your industry or take an average of what you’ve earned over the last several years.
A term life insurance calculator is the easiest way to calculate life insurance coverage needs. All you have to do is answer a few questions about your family, income, and debt to receive an estimated coverage amount appropriate for your needs.
Choosing the best life insurance option for you
The best life insurance policy for you will depend on your needs and income. Term life insurance is often the most affordable life insurance for self-employed people. With level term life insurance, premiums
remain the same, making it easier to budget, even with fluctuating income.
If you want your life insurance policy to last a lifetime instead of ending after a set period of years, a permanent life insurance policy is the better option. We recommend talking to a licensed insurance agent if you’re unsure of the type of life insurance you should get based on your income and requirements.
How to get self-employed life insurance
Once you understand how much coverage you need, it’s time to shop for a policy. The process is quick and easy and can be completed from the comfort of home by following these steps.
- Gather documents to prove residency, age, identity, and income.
- Get a life insurance quote online or speak to an agent from an insurance company to get quotes and compare options, ideally for multiple coverage amounts and policy types, to see which one best meets your needs and budget.
- Complete an application and answer questions about health, lifestyle, and employment, as required.
- Take a medical exam, if required. Fidelity Life allows applicants for specific policies up to six months to take the exam. In some instances, the medical exam could be waived entirely.
- Receive approval and pay for your policy.
- Assign beneficiaries. You can choose one or many beneficiaries for your life insurance policy. These individuals will receive the death benefit if you pass away. It’s advisable to choose at least one primary and one contingent beneficiary. That way, you’ll know that the policy’s death benefit is going to someone you choose, even if something happens to your primary beneficiary.
Is life insurance tax-deductible if you’re self-employed?
Unlike health insurance premiums and other ongoing business expenses, life insurance premiums are not tax-deductible if you’re self-employed. But there are exceptions.
If you’re a sole proprietor, LLC, or S corporation, and you offer your employees life coverage as part of a benefits package, you can deduct the premiums you pay from your income tax as long as your company is not a direct or indirect beneficiary of the policy. However, this does not apply to freelancers and gig workers.1
The good news is that while premiums may not be tax-deductible, the death benefit for your loved ones is almost always tax-free.
Find the best life insurance for self-employed workers
With Fidelity Life, it’s easy to get your free self-employed life insurance quote within minutes, with coverage for some policies, like RAPIDecision® Life, often beginning the same day. If you’re unsure of the coverage you should get as a business owner or want to discuss your requirements, contact an agent who can walk you through how to find and apply for the right policy.
FAQs
What are the exceptions to tax-free life Insurance payouts?2
There are several instances when death benefits paid from life insurance are considered taxable income by the Internal Revenue Service.
One common instance where your beneficiaries may need to pay taxes on the death benefits is if the insurance company pays the benefit to the beneficiaries in installments on request from the insured. In such a case, because the payouts earn interest, the Internal Revenue Service requires the beneficiaries to pay taxes on the interest and report it as part of their total taxable income when filing tax return on their gross income.
Tax deductions may also apply to the death benefits of a life insurance policy if you (the insured) name your estate as the beneficiary. However, the Internal Revenue Service stipulates that tax deductions only apply here if the estate’s new total value is worth more than $13.6 million.
Surrendering whole life policies for a cash payout may also attract a tax deduction on your payouts. If the lump sum payout is more than the value of the policy, the profit may be subject to income tax by the Internal Revenue Service.
Can I deduct life insurance as a business expense?3
Generally, the Internal Revenue Service does not allow you to deduct premiums paid as a business expense in any tax year, even if you’re a self-employed taxpayer. According to the IRS, the premiums are a personal expense and, therefore, don’t provide any tax advantages on life insurance, unlike qualified medical expenses. However, there are exceptions where life insurance premiums are considered tax-deductible expenses.
For instance, if your business provides life insurance to executives as part of a bonus plan, you can deduct the premiums paid as compensation. However, the executive must include the premium amount in their total taxable income for your business to enjoy the tax break. Additionally, key person life policies are tax-deductible because your business can claim the payouts as lost earnings.
What is an example of a tax-deductible business expense?4
An example of a tax-deductible business expense is contributions to a qualified retirement savings plan for employees, such as 401(k) plan. Because you make these contributions on a tax-deferred basis, your business can deduct the contributions in the tax year you make them. Other examples of tax-deductible business expenses as outlined by the 2017 Tax Cuts and Jobs Act (TCJA) include employee benefits, salaries, home office expenses, legal and professional expenses, etc.