The world is changing, see why your life insurance should too.
Self-employed people make up around 30% of the workforce in the United States, which is a reasonably significant amount when you come to think of it. However, if you're your own boss, you won’t get the same benefits as employees at companies. Therefore, covering yourself with protection like life insurance becomes even more important.
In this guide, we’re looking at self-employed life insurance and everything you need to know about getting coverage.
Whether you call yourself a freelancer, contractor, or self-employed, heading out on your own can be an exciting time in your professional career. It can also be daunting, especially if you don't have the required insurance in place should things not go to plan.
That’s where life insurance comes in, as it offers both yourself and your loved ones extra financial security–in life and death. But which life insurance policy should you consider?
For many, life insurance offers their loved ones financial protection should the worst happen. If, for example, you run a grocery store, your loved ones could be left with all sorts of overheads should you pass–not to mention, they would need to fend for themselves. From that point of view, it’s fair to say that life insurance is a no-brainer.
However, life insurance coverage doesn’t only need to focus on when you die and what your loved ones get. It can actually prove to be beneficial while you’re still alive, giving you security later in life that is perhaps harder to come by when you’re self-employed.
Therefore, the question becomes, "which self-employed life insurance should I get–one with a death benefit, coverage that will look after me while I'm still alive, or both?" Fortunately, life insurance is highly customizable, so you can tailor a plan to your needs.
A term policy is often popular with self-employed people. It lasts for a specific amount of time, often anywhere between five and 30 years. So if you’re self-employed for 20 years, theoretically, you could cover yourself for that time period.
Getting term coverage also means paying the lowest premiums available–it's cheaper than other life insurance options. On the surface, this might seem beneficial but dig a little deeper, and a term policy might not be as good of a deal as you first thought.
Yes, it's more affordable to begin with. Plus, if you get a policy in your 20s, you can enjoy particularly low premiums. However, should that policy end 30 years later but you wish to renew, you will be charged a premium at your current age. Therefore, you'll pay for new coverage as a 50-year-old, which means higher premiums.
A term policy doesn’t have any bells and whistles either: you pay into your premium for the term you're covered, and that’s it–unless you die, of course, and your loved ones get a payout. However, we wouldn’t really call that a win.
Term life insurance in a nutshell
A term policy is cheaper than other life insurance options, but it only has a death benefit. There are no benefits should you live to the end of the policy, and you will need to renew at your new age if you want to extend your coverage for longer than the initial term.
Like term, a permanent life insurance policy also has a death benefit for your loved ones. But it provides other incentives while you’re still alive, such as wealth accumulation. For this reason, a perm policy is more expensive than term coverage. It also doesn’t expire, which means your premiums are locked in from the minute you sign up–you’ll pay the same amount at 25 as you do at 55. For many, this offers more long-term value than a term policy.
On top of locked-in premiums, you can enjoy benefits while you're still alive. These include a cash-value element and tax-free savings. Let's explore them in more detail.
When you get permanent life insurance, you essentially pay into two pots: death benefit and cash value. Both of these grow over time, and you can access the cash-value element while you're still alive. Therefore, you can build savings alongside your self-employed success, using your life insurance as a savings account. When it comes to accessing the cash value of your savings, the death benefit remains untouched–you still have something to leave to your loved ones. Accessing cash from your life insurance can not only help pay for living expenses but may even save their business in extreme circumstances.
That handy cash-value aspect we mentioned also happens to be tax-free. When you withdraw the money saved, you have the option to take it out as a 0% loan, and because you can’t pay tax to yourself, you don’t need to worry about sending any money to the IRS. Now, you might be thinking that a loan to yourself seems somewhat strange, but it’s actually quite straightforward. When you pass, you repay the loan via your death benefit, which has also accrued in value over time. Therefore, you will still have a significant amount to pass onto your loved ones, and you got to enjoy your financial benefits from a permanent policy while you were still alive. That’s a win-win.
On top of that, life insurance can be an excellent addition to other business-owner retirement plans, such as a solo 401K, SEP IRA, or Defined Benefit Plans. With those accounts, you need to pay taxes on the money you earn. But with a permanent life insurance policy, your earnings are tax-free, and they continue to grow even after you’ve withdrawn the cash value as long as you continue paying into your premiums.
Along with term and perm policies, you can also choose riders. These essentially act as add-ons to your coverage and can provide you with different benefits. They include things like accelerated death benefits, which allow you to access the death benefit in cash should you fall seriously ill or be unable to work due to injury. Long-term care riders, which offer nursing or home care later in life, are also available.
Riders are optional, with some offered for free and others coming at a cost. As a self-employed person, you may find that some life insurance riders are beneficial and therefore want to explore your options and customize your coverage. For example, over 52% of individuals need long-term care in their lifetime. If you’re self-employed, you have fewer safety nets than if you work for an organization, which only heightened the need to protect yourself against the things you can’t plan for.
Well, that depends. What kind of business owner are you?
LLC, LLP, or S-corp
In this type of business structure, your business income “passes through” to your individual income. And while you can’t deduct life insurance from your personal earnings, you can claim it if you provide your employees with group life insurance policies.
Bummer that you have to pay corporate and individual taxes, but not in the realm of life insurance. There are policies called Executive Bonus Plans that can be set up for yourself or your employees and can be deducted from your corporate income and compensate for any individual income taxes that are due on the “bonused” premium.
Getting life insurance when you’re self-employed can provide you with more stability and peace of mind. And now that you know which options are available, you can make an informed decision about the best self-employed life insurance option for you and then get back to focusing on turning your business venture into a worldwide success.
The world is changing, see why your life insurance should too.