Life Insurance for Self-Employed Professionals: Tailoring Coverage to Your Risks

Self-employment offers freedom and flexibility—you can pick your hours and projects. You can be the boss of your own business. Still, it would be a lie to say it doesn’t expose you to financial vulnerabilities. You won’t have employer-provided benefits, such as life insurance and paid leave. That means you will have to design your own safety net.

In this guide, we will go over how to tailor life insurance to the unique risks of self-employment, from income fluctuations to business-related exposures.

Why Self-Employed Professionals Need Life Insurance

A life insurance payout can offer thousands or millions of dollars to your beneficiaries. This immediate payout can skip probate court, allowing your beneficiaries to receive immediate support. Whether that money goes to your family or your business, it is a significant amount that can maintain your legacy and protect those you love.

Here are the main reasons that self-employed professionals in particular need life insurance:

No employer-provided insurance coverage

People who have formal employment often receive employer-provided group life insurance. Unfortunately, self-employed professionals like freelancers and contractors will not be receiving any employee insurance, whether that’s health, dental, or vision.

If you are the business owner, it may not make financial sense or be possible for you to get the same insurance plan as your employees.

Dependents rely solely on the individual’s earnings

Are you the sole income earner? Self-employed individuals with at least one dependent who is entirely (or mostly) reliant on their income should highly consider life insurance. Families have a lot of ongoing expenses that cannot be managed if the sole income earner passes away or becomes incapacitated. If your loved ones can no longer afford the mortgage, then the house may be lost. A life insurance payout can prevent that horror from happening.

Life insurance for business continuity planning

Are you the owner or co-owner of a business? Many self-employed individuals are the owners of their own business. This means that they will need to cover their own life insurance, or have key person insurance that functions as coverage for the business.

Unique Exposures Faced by the Self-Employed

Income instability

Many self-employed professionals face income instability where one month to the next, it is difficult to predict how much income they make. In addition, many self-employed professionals encounter project-based or seasonal fluctuations. You might make a lot of money around December, but struggle to pay rent during June.

Because of this, it can be harder to build up significant savings, and it’s a common fear that if they pass away, their loved ones won’t be able to deal with expenses. This could mean losing a home or failing to afford a child’s future tuition. A financial safety net for your loved ones would be greatly appreciated, and a life insurance plan could be the best solution.

Business debt obligations

Self-employed individuals often take out loans, leases, or credit lines in order to build up their business. These are tied to the owner, so if the business fails, creditors and lenders will likely start knocking on the front door. If the owner passes away, that debt will go to the estate. Typically, the family does not have to directly pay off the debt.

Unfortunately, business debt can hurt the owner’s families who might have their inheritances and lives impacted. If debts exceed assets, it is even possible for the heirs to receive nothing. A life insurance payout can help pay for business debt and financial obligations.

Key-person risk

A self-employed professional’s disability or death could collapse the business. This is because self-employed individuals are usually an indispensable owner of the business. Without sufficient funds to deal with business expenses and continuity, it is possible that none of your business employees or beneficiaries would be able to easily afford stepping up.

No automatic benefits

If you are self-employed, you won’t be getting any group health, disability, or life insurance policies from an employer. You have to look at a marketplace or private provider to find suitable policies, which includes comparing quotes and sifting through different websites.

Policy Design Considerations

Term Life Insurance

Term life insurance only lasts for the term duration (e.g. 5 or 10 years). It is the most affordable way to buy life insurance and is typically an easier purchase for self-employed professionals who are just starting out and cannot budget for long-term expenses.

Self-employed professionals should consider term life insurance as an affordable type of protection during business-building years. It is ideal for covering a self-employed individual’s family expenses, mortgages, or business loans.

Permanent Life Insurance

Permanent life insurance lasts your entire life (unless you surrender it). It has a cash value component that doubles as an asset for retirement or emergencies. In addition, it can come with advantages such as:

• Adjustable premiums in universal life insurance
• Loans you can take against your life insurance policy
• Locking in lower premiums, costing less over time

Permanent life insurance is best for long-term estate planning or business succession. It is not suitable for every self-employed individual but if it is, it can offer immense benefits. If you opt for whole life insurance, you can qualify for perpetually lower premiums for the rest of your life–while you are still young, so you won’t need to go through hoops because of health conditions.

Whole life policies and universal life policies are both forms of permanent life insurance. Life insurance payouts are not generally treated as taxable income, and can also help immensely with estate planning.

Hybrid Strategies

It’s definitely possible to choose both term and whole life insurance policies. You can start with a term life insurance plan with a company that lets you convert to permanent, as many companies do. This way you can choose to only convert if you feel like it would be to your benefit. Keeping your options open allows you to balance coverage affordability and longevity. Some people may also want to layer different life insurance policies to match business growth stages.

Read more about When to Convert Term Life to Permanent in our financial planning guide.

Income Fluctuations and Coverage Planning

Adjusting policy size based on variable income

Typically, you want a life insurance plan that has at least 10x your income. But what do you do if you have variable income? Many self-employed people earn significantly more or less from month to month, year to year, particularly in the earlier parts of their career.

Using flexible premium policies

Universal life insurance has the most flexible premium options. Because of this, it may be advantageous to opt for a flexible universal life insurance plan if you’re a self-employed individual.

If your policy allows, you might be able to choose a lower (or higher) premium and adjust your coverage accordingly. This is only possible if you have a flexible premium plan, which comes with:

• Universal life insurance
• Variable Universal Life Insurance (VUL)
• Indexed Universal Life Insurance (IUL)
• Adjustable Life Insurance

Reassessing coverage regularly as business changes

As your business expands, stabilizes, or fails, it is important to reassess your life insurance. You may start needing more coverage because of greater risks. Increased income can also drastically increase your dependents’ living expenses and your business costs.

Business-Specific Coverage Needs

Buy-Sell Agreements

Funding a buy-sell agreement with your life insurance policy can be an excellent way for smoother ownership transfers of your business. If you are the owner of your business, you and other owners/partners can discuss how a buy-sell agreement should be properly funded. It is a good idea to consult with a financial advisor to ensure the life insurance policies and buy-sell agreements are properly drafted to your wishes.

Key Person Insurance

Key person insurance is business life insurance for specific personnel who are crucial to the business’ continuation or success. This is used to protect the business if someone’s expertise is irreplaceable. This could be the business owner, top manager, spokesperson, or any other key personnel.

Loan Life Protection

You may want to consider loan protection to mitigate the difficulty of debts in case you become disabled or pass away. Loan life insurance can protect your business and/or family from becoming burdened by any outstanding debt from various loans. While lenders cannot generally mandate that you have loan protection, it is an optional form of coverage that could safeguard your payments.

Tailoring Coverage to Different Professions

Freelancers & creatives

Freelancers who write, draw, photograph, or otherwise create content may want to focus on personal/family protection and income replacement. This means a standard term life insurance policy should be adequate. Specific coverage is not typically needed.

Contractors & tradespeople

Self-employed individuals who work in riskier fields should consider greater life insurance coverage. These may come with higher premiums, so make sure to compare quotes and pick a price that you can comfortably manage.

Consultants & professionals

Cash value policies may double as retirement supplements for consultants and professionals who want that extra layer of protection.

Practical Steps for the Self-Employed

Calculate both personal and business financial obligations

First, look at your financial obligations. From mortgages to business loans, consider both personal obligations and business debt. List the amounts out to see at least how much life insurance payout is necessary for everything. That way, in case you do pass away, your beneficiaries would be able to handle the obligations with the life insurance payout.

Decide between term, permanent, or blended solutions

Universal life insurance policies are great in that they let you lock in lower premiums and adjust your premiums or coverage as needed. You can even get valuable cash growth and borrowing options, which could serve you in retirement or emergencies.

But remember: Whether or not a permanent life insurance policy is worth it for you is a massively important choice. Committing to a permanent life insurance policy comes with cash growth and extra benefits, but it is a permanent premium you would be paying. Having to surrender the policy is of course possible, but frustrating for many people who need to go through the process.

Shop for insurers experienced with self-employed clients

It’s always good to choose an insurance company that is familiar with the needs of self-employed clients. This could mean their agents are able to easily and clearly answer all your questions, or they have a customized webpage just for the self-employed.

Consider bundling life insurance with disability coverage

For full protection, you may want to bundle your self-employed life insurance policy with disability coverage. Bundled policies are more convenient and can be cheaper overall.

Conclusion

Self-employed professionals face unique risks, so coverage must reflect both personal and business needs. Ask yourself:

• Do I want a flexible premium plan?
• Term or permanent life insurance?
• Do I need business owner life insurance?

Work with a financial advisor to customize a plan that safeguards your family, income stability, and business. Review the best life insurance companies to cover your self-employed risks today.