Life Insurance for Self-Employed

What is Life Insurance?

Life insurance is a contract between an individual and an insurance company, where the individual pays regular premiums in exchange for a lump sum payment, known as a death benefit, to their beneficiaries if something happens to them. By guaranteeing a death benefit if a policy is triggered, life insurance provides financial security to an insured’s dependents, helping them maintain their living standards in the event of the insured’s untimely death.

There are multiple types of life insurance policies to suit different needs and circumstances. Term life insurance provides the most cost-effective coverage and lasts for a specified period – typically 10, 20, or 30 years. If the policyholder dies within this term, the death benefit is paid to the beneficiaries. On the other hand, permanent life insurance provides lifelong coverage and has a cash value component that grows over time. 

How Life Insurance Works

When a person buys a life insurance policy, they first go through an application process. This involves an extensive questionnaire and is often accompanied by a medical exam. Once they complete the process, the insurance company gives the applicant options for policy sizes and premiums they’re willing to provide. 

Once a person gets a life insurance policy, they pay a regular premium to the insurance company. In return, the company promises to pay a certain amount to their designated beneficiaries upon their death. The premium amount varies depending on several factors, including the policyholder’s age, health, lifestyle, and the size of the policy. Typically, younger, healthier individuals pay lower premiums as insurers consider them a lower risk.

How Life Insurance Works for Self-Employed Individuals

For self-employed individuals, life insurance can play a significant role in ensuring the financial security of their dependents. Unlike traditional employees, entrepreneurs and self-employed individuals cannot access benefits such as employer-funded life insurance. This means they must take it upon themselves to secure a suitable life insurance policy. The policy could serve as a safety net for their dependents, providing them with funds to maintain their livelihood in case of the policyholder’s untimely death. 

For self-employed professionals, life insurance policies could also secure the continuity of their business by covering unexpected expenses or debts that the business might incur.

Why Self-Employed Individuals Need Life Insurance

For many self-employed individuals, the hustle of work can sometimes overshadow the need for long-term financial planning. However, securing an adequate life insurance policy is a vital aspect of financial security for a self-employed person and those who depend on their income. 

Here are some of the reasons why life insurance is essential for self-employed individuals:

• Income replacement: For self-employed individuals, their income is their business. In the event of their untimely death, a life insurance policy can replace lost income, allowing their dependents to maintain their lifestyle.
• Debt coverage: Self-employed individuals often have business loans or other debts that don’t disappear upon death. Life insurance can help cover these debts, preventing them from burdening family members or business partners.
• Business continuity: A life insurance policy can offer funds to keep the business running in the event of the policyholder’s death. This can be especially important for businesses with multiple partners, where a buy-sell agreement funded by life insurance can ensure a smooth transition.
• Retirement savings: Certain types of life insurance can function as a tax-advantaged savings vehicle, helping self-employed individuals amass funds for retirement.
• Estate planning: Life insurance can provide liquidity to cover estate taxes, protecting the policyholder’s assets from being sold off hastily to cover tax liabilities.

Tips for Getting Life Insurance if You’re Self-Employed

If you’re self-employed, applying for life insurance can seem like a pain. Below are a few tips to make the process more manageable and ensure you land the best policy for your needs. 

• Know why you’re buying insurance. Assess your personal and professional financial obligations to identify the amount and type of coverage you need. This could include factors like mortgage or rent, living expenses, education costs for dependent children, business loans, and future financial goals. 
• Consider your health. The state of your health significantly influences life insurance premiums. Regular exercise, a balanced diet, and routine check-ups can help you maintain good health, leading to lower premiums. 
• Shop around. Don’t jump on the first policy you come across. Instead, shop around and compare different policies from various providers. This will allow you to get a feel for the process, understand the range of products available, and make an informed decision.
• Seek professional advice. Getting advice from a licensed financial advisor or insurance broker can provide invaluable insights and help you find the best policy.
• Review your policy regularly. Your needs and circumstances can change over time, and your policy should evolve to reflect these changes. Regularly review your policy – at least once every couple of years – to ensure it still provides adequate coverage.
• Consider additional riders. Depending on your specific circumstances, consider adding riders to your policy. Riders are benefits you can add to a basic life insurance policy. For instance, a disability income rider could provide a monthly income if a severe illness or injury prevents you from working.

Another step that can help with several of these items is to work with an online insurance marketplace like Ethos to understand your policy options. Ethos can match you with the most affordable policy option, give you options regarding policy amounts and premiums, and often help you bind coverage without undergoing time-consuming medical exams.