Why Self-Employed Workers Need Life Insurance 
Talk to one of our experienced advisors, today!
18 minute read
Originally published: March 14, 2023
Why Self-Employed Workers Need Life Insurance 
Talk to one of our experienced advisors today!
18 Minute read
Originally published: March 14, 2023
As a self-employed worker, you are responsible for your own business and financial security. While being your own boss can be liberating, it also means that you need to take additional steps to protect yourself and your loved ones in the event of the unexpected. One important way to do this is by obtaining life insurance coverage. In this blog, we’ll explore the various reasons why self-employed workers need life insurance, the different types of policies available, how to determine the appropriate amount of coverage, and common misconceptions about life insurance for self-employed individuals. Whether you’re just starting out as a self-employed worker or you’ve been in business for years, understanding the importance of life insurance can help provide peace of mind and financial security for yourself and your loved ones.
Case Study: The Importance of Life Insurance for Self-Employed Workers
Jason was a self-employed contractor who ran his own business. He was in his mid-thirties, married with two young children, and had always been healthy. Jason never thought much about life insurance, believing that he was young and had plenty of time to worry about it later.
Unfortunately, tragedy struck when Jason unexpectedly passed away from a heart attack. His family was devastated by the loss, both emotionally and financially. They relied heavily on Jason’s income to cover the mortgage, bills, and other expenses. With his passing, his family was left with a mountain of debt and no clear plan for how to move forward.
Had Jason invested in life insurance, the financial burden on his family may have been reduced. With a life insurance policy in place, his family could have received a lump sum payment to cover the expenses related to Jason’s death and any outstanding debts. This would have allowed them time to grieve without the added stress of financial worries.
Without life insurance, Jason’s family was left to rely on savings and support from family and friends. His wife had to sell their home and downsize to a smaller apartment. His children had to change schools and adjust to a new way of life. The financial impact of Jason’s passing was felt for years to come.
This case study highlights the importance of life insurance for self-employed workers. While it’s easy to assume that life insurance is not necessary when you’re young and healthy, the unexpected can happen at any time. Self-employed individuals often have unique financial circumstances and obligations that require additional planning and protection. Investing in life insurance can provide peace of mind and financial security for yourself and your loved ones. It’s never too early to start thinking about life insurance and taking steps to protect your future.
In this article:
- What is Life Insurance and Why is It Important for Self-Employed Workers?
- How Does Being Self-Employed Affect Your Need for Life Insurance?
- What Are the Different Types of Life Insurance Policies Available for Self-Employed Workers?
- How Do You Determine How Much Life Insurance Coverage You Need as a Self-Employed Worker?
- How Can Life Insurance Benefit Your Family and Business in the Event of Your Death?
- What Are the Tax Implications of Life Insurance for Self-Employed Workers?
- How Can Life Insurance Be Used as an Investment Vehicle for Self-Employed Workers?
- How Does the Age and Health of a Self-Employed Worker Affect Their Life Insurance Options and Premiums?
- What Are the Common Misconceptions About Life Insurance for Self-Employed Workers?
- Frequently Asked Questions (FAQs) about Why Self-Employed Workers Need Life Insurance
What is Life Insurance and Why is It Important for Self-Employed Workers?
Life insurance is a financial product that pays out a lump sum of money to a designated beneficiary upon the death of the insured person. The policyholder typically pays a premium either monthly or annually, in exchange for the promise of the insurance company to provide the death benefit to the beneficiary.
For self-employed workers, life insurance is important because they do not have the same benefits and protections as employees of a company. Without life insurance, the sudden death of a self-employed worker can have a devastating impact on their family’s finances and their business. Life insurance can help provide financial security and peace of mind for the self-employed worker and their loved ones in the event of an unexpected death. It can also help cover expenses related to funeral costs, outstanding debts, and ongoing living expenses. In addition, life insurance can be used as a tool for business planning, such as funding a buy-sell agreement or key person insurance to protect the business from the financial impact of the death of an owner or key employee.
How Does Being Self-Employed Affect Your Need for Life Insurance?
Being self-employed can affect your need for life insurance in several ways.
First of all, self-employed individuals are typically responsible for their own financial security and that of their dependents, whereas employees may have access to group life insurance coverage provided by their employer. Therefore, self-employed individuals may need to take extra steps to ensure that their loved ones are financially protected in the event of their death.
The death of a self-employed worker can have significant financial consequences for their business. Without the owner, the business may struggle to continue operating, which can lead to lost income for the owner’s family and employees. Life insurance can help to provide the necessary funds to cover the costs of hiring a replacement, paying off business debts, and keeping the business afloat during a difficult transition period.
Finally, self-employed workers may have unique financial circumstances that require a tailored life insurance policy. For example, a self-employed worker may have fluctuating income, irregular expenses, or be in the process of building a business that requires significant financial investment. Our financial advisors and insurance agents can help self-employed individuals assess their life insurance needs based on their individual circumstances and provide guidance on the most appropriate policy for their situation.
What Are the Different Types of Life Insurance Policies Available for Self-Employed Workers?
There are several types of life insurance policies available for self-employed workers. Here are some of the most common:
- Term life insurance: This type of policy provides coverage for a specified term, typically ranging from 1 to 30 years. If the insured person dies during the term of the policy, the death benefit is paid out to the designated beneficiary. Term life insurance is generally less expensive than other types of life insurance and is a good option for self-employed workers who want affordable coverage for a specific period of time.
- Permanent life insurance: Permanent life insurance provides coverage for the entire lifetime of the insured person. These policies can include a savings component that allows the policyholder to accumulate cash value over time, which can be borrowed against or used to pay premiums. Permanent life insurance is more expensive than term life insurance but provides long-term financial protection and savings.
- Universal life insurance: Universal life insurance is a type of permanent life insurance that combines a death benefit with a savings component. The policyholder can adjust the premium payments and death benefit amount over time to fit their changing needs.
- Variable life insurance: This type of permanent life insurance allows the policyholder to invest the cash value of their policy in a range of investment options, such as stocks or mutual funds. The value of the policy can fluctuate based on the performance of the investments.
- Group life insurance: Some self-employed workers may be able to obtain life insurance coverage through a professional or trade organization that offers group life insurance policies. These policies are typically less expensive than individual policies, but may offer less flexibility and lower coverage amounts.
- Key person insurance: This type of policy provides coverage for a business in the event that a key employee, such as the owner, dies unexpectedly. The death benefit can be used to cover the costs of hiring and training a replacement or to help keep the business afloat during a difficult transition period.
- Buy-sell agreement: A buy-sell agreement is a legal agreement that allows the remaining owners of a business to purchase the shares of a deceased owner. Life insurance can be used to fund the purchase of the deceased owner’s shares and ensure a smooth transition of ownership.
How Do You Determine How Much Life Insurance Coverage You Need as a Self-Employed Worker?
Determining how much life insurance coverage you need as a self-employed worker depends on several factors, including your financial obligations, future financial goals, and personal circumstances. Here are some steps to help you determine how much coverage you need:
- Calculate your financial obligations: Start by adding up your current debts, such as your mortgage, car loans, credit card debt, and other loans. This will give you an idea of how much money your loved ones would need to pay off your debts if you were to pass away.
- Estimate your future financial needs: Consider the future financial needs of your family, such as college tuition for your children, ongoing living expenses, and retirement savings. You may want to consult with a financial advisor to help you estimate these costs.
- Determine your income replacement needs: Estimate how much income your family would need to maintain their standard of living if you were to pass away. A common rule of thumb is to have life insurance coverage equal to 10-12 times your annual income.
- Consider your personal circumstances: Your personal circumstances, such as your age, health, and lifestyle, can also impact the amount of coverage you need. For example, if you have young children or dependents, you may need more coverage than if you are single with no dependents.
- Review and update your coverage regularly: It’s important to review and update your life insurance coverage regularly to ensure it aligns with your current financial needs and circumstances.
Remember, the amount of coverage you need may vary depending on your unique situation, so it’s important to carefully consider your financial obligations and future goals before purchasing a life insurance policy.
How Can Life Insurance Benefit Your Family and Business in the Event of Your Death?
Life insurance can provide several benefits for your family and business in the event of your death. Here are some ways life insurance can be beneficial:
- Provides financial support for your family: If you were to pass away, your life insurance policy can provide financial support to your family by paying a death benefit. This can help cover immediate expenses, such as funeral costs, and provide ongoing financial support for your loved ones.
- Pays off outstanding debts and obligations: If you have outstanding debts or obligations, such as a mortgage or business loans, your life insurance policy can provide funds to pay off these debts, helping to ensure that your family and business are not burdened with financial obligations.
- Helps maintain your family’s standard of living: If you were to pass away, your life insurance policy can help your family maintain their standard of living by providing ongoing income to cover expenses such as mortgage payments, utilities, and other living expenses.
- Provides funding for business operations: If you are a self-employed worker or a business owner, life insurance can provide funding to help keep the business operating in the event of your death. This can help cover expenses such as payroll, taxes, and other ongoing business expenses.
- Helps with estate planning: Life insurance can also play a role in estate planning, helping to ensure that your assets are distributed according to your wishes and that your family and business are protected in the event of your death.
Overall, life insurance can provide peace of mind knowing that your loved ones and business will be taken care of in the event of your unexpected death.
What Are the Tax Implications of Life Insurance for Self-Employed Workers?
Life insurance for self-employed workers can have tax implications, and it’s important to understand how your policy may be taxed. Here are some key tax considerations to keep in mind:
- Premium payments: Premium payments for life insurance policies are typically not tax-deductible for self-employed workers, unless the policy is being used to fund a qualified retirement plan.
- Death benefit: The death benefit paid out to your beneficiaries is typically not considered taxable income. However, if the death benefit is paid out over time as a series of payments, the interest portion of those payments may be taxable.
- Cash value: If your life insurance policy has a cash value component, the growth of the cash value is generally tax-deferred. However, if you withdraw cash from the policy or surrender the policy, any gains on the cash value may be subject to income taxes.
- Estate taxes: Depending on the size of your estate, the death benefit from your life insurance policy may be subject to estate taxes. In 2023, the federal estate tax exemption is $12.06 million per person, so if your estate is valued at more than that amount, your beneficiaries may owe estate taxes on the death benefit.
How Can Life Insurance Be Used as an Investment Vehicle for Self-Employed Workers?
Life insurance can be used as an investment vehicle for self-employed workers through a type of policy called permanent life insurance, which includes both whole life and universal life insurance. Permanent life insurance policies offer cash value accumulation and tax-free growth, making them a tax-efficient way to save for retirement or invest money. They also offer flexible premium payments, which can be helpful for self-employed workers whose income may fluctuate. Additionally, permanent life insurance can be used as an estate planning tool, allowing you to pass on your wealth to beneficiaries tax-free. While permanent life insurance offers investment benefits, it typically has higher premiums than term life insurance, and investment returns may not be as high as other investment vehicles. It’s important to carefully consider investment goals and risk tolerance before investing in permanent life insurance.
How Does the Age and Health of a Self-Employed Worker Affect Their Life Insurance Options and Premiums?
The age and health of a self-employed worker can have a significant impact on their life insurance options and premiums. Here are some ways that age and health can affect life insurance:
- Eligibility for coverage: Some life insurance policies have age limits for eligibility. For example, some policies may not be available to individuals over a certain age, such as 70 or 75. Additionally, pre-existing health conditions may make it difficult to qualify for certain types of coverage.
- Premiums: Life insurance premiums are typically based on age and health. Younger individuals generally pay lower premiums than older individuals because they are considered to be a lower risk. Similarly, individuals in good health typically pay lower premiums than those with health conditions.
- Medical underwriting: When you apply for life insurance, the insurer may require you to undergo medical underwriting, which includes a review of your medical history and may also include a physical exam. The results of the underwriting process can affect your eligibility for coverage and your premium rates.
- Type of coverage: The type of coverage you choose can also be affected by age and health. For example, term life insurance may be a more affordable option for younger, healthier individuals, while permanent life insurance may be a better fit for older individuals or those with health conditions.
It’s important to work with a life insurance agent or broker to understand how your age and health may affect your coverage options and premiums. They can help you find the right policy to meet your needs and budget. Additionally, if you have health conditions or other concerns, they may be able to help you find policies with more flexible underwriting requirements or specialized coverage options.
What Are the Common Misconceptions About Life Insurance for Self-Employed Workers?
There are several common misconceptions about life insurance for self-employed workers. Here are some of them:
- “I don’t need life insurance because I don’t have dependents”: Many self-employed workers assume that if they don’t have dependents, they don’t need life insurance. However, life insurance can still be beneficial for covering end-of-life expenses or paying off business debts. Additionally, if you plan to have dependents in the future, getting life insurance while you are younger and healthier can be more affordable.
- “I can’t afford life insurance”: Life insurance can be more affordable than many people think, especially for younger individuals in good health. Term life insurance is often the most affordable option, and premiums can be adjusted to fit your budget.
- “I can rely on my savings instead of life insurance”: While it’s important to have savings, relying solely on your savings to cover end-of-life expenses or other financial obligations may not be feasible. Life insurance can provide a financial safety net for your loved ones in the event of your unexpected death.
- “I don’t need as much coverage as someone with a traditional job”: The amount of life insurance coverage you need should be based on your individual circumstances, including your income, debts, and financial goals. Self-employed workers may have additional financial obligations, such as business debts or expenses, that need to be taken into account when determining coverage needs.
- “I can’t get life insurance if I have a pre-existing health condition“: While having a pre-existing health condition can affect your life insurance options and premiums, it doesn’t necessarily mean you can’t get coverage. Some policies have more flexible underwriting requirements, and there are specialized policies, such as guaranteed issue life insurance, that may be available for those with certain health conditions.
How Can You Compare and Shop for Life Insurance Policies as a Self-Employed Worker?
As a self-employed worker, shopping for life insurance can feel overwhelming. Here are some steps to help you compare and shop for life insurance policies:
- Determine your coverage needs: Before you start shopping for life insurance, it’s important to determine how much coverage you need. Consider your income, debts, and financial goals, as well as any business expenses or obligations you may have.
- Research different types of policies: There are many types of life insurance policies available, including term life, whole life, and universal life insurance. Research the pros and cons of each type of policy to determine which one best fits your needs and budget.
- Get multiple quotes: Once you have an idea of the type of policy you want, get multiple quotes from different insurers. This will help you compare prices and find the best deal.
- Understand the underwriting process: Life insurance underwriting involves a review of your medical history and other factors that could affect your eligibility for coverage or your premium rates. Make sure you understand the underwriting process for each policy you are considering.
- Work with a licensed agent or broker: A licensed life insurance agent or broker can help you navigate the shopping process and provide guidance on the policies that best meet your needs. They can also help you understand any exclusions or limitations in the policy, such as pre-existing condition clauses or suicide exclusions.
- Read the policy carefully: Before you purchase a policy, make sure you read it carefully and understand all the terms and conditions. Pay attention to any exclusions, limitations, or riders that may affect your coverage.
- Consider the financial strength of the insurer: It’s important to choose a life insurance company with a strong financial rating, as this can indicate their ability to pay out claims in the future.
By following these steps, you can compare and shop for life insurance policies as a self-employed worker and find the coverage that best meets your needs and budget.
Frequently Asked Questions (FAQs) about Why Self-Employed Workers Need Life Insurance
Self-employed workers need life insurance for several reasons. First, life insurance can provide financial support for dependents in the event of the policyholder’s unexpected death. Additionally, life insurance can help cover end-of-life expenses and pay off any outstanding debts or financial obligations.
The amount of life insurance coverage you need as a self-employed worker depends on your individual circumstances, including your income, debts, financial goals, and any business expenses or obligations. A licensed life insurance agent or broker can help you determine the appropriate amount of coverage for your needs.
Self-employed workers can choose from several types of life insurance policies, including term life insurance, whole life insurance, and universal life insurance. Each type of policy has its own benefits and drawbacks, so it’s important to understand the differences between them before making a decision.
Yes, some types of life insurance policies, such as whole life insurance and universal life insurance, can be used as investment vehicles. These policies typically have cash value components that can grow over time and provide a source of funds for the policyholder.
Your age and health can affect your life insurance options and premiums as a self-employed worker. Generally, younger and healthier individuals will have more affordable premiums than older or less healthy individuals. Some health conditions may also limit the types of policies you are eligible for or increase your premium rates.
To compare and shop for life insurance policies as a self-employed worker, it’s important to determine your coverage needs, research different types of policies, get multiple quotes, understand the underwriting process, work with a licensed agent or broker, read the policy carefully, and consider the financial strength of the insurer.
Find a solution for what you’re looking for
If you’re a self-employed worker, it’s important to know that you can still qualify for life insurance coverage, even if you don’t have a traditional employer. However, the process of obtaining coverage may be slightly different than it is for those who work for someone else. Self-employed individuals may need to provide additional documentation, such as tax returns or business financial statements, to demonstrate their income and insurability. It’s also important to accurately assess the value of your business and any outstanding debts or financial obligations when determining the appropriate amount of coverage. While there may be some unique challenges associated with obtaining life insurance coverage as a self-employed worker, it’s important to work with a licensed life insurance agent or financial advisor to determine the best course of action for your specific situation. Protect Your Wealth can help you get it by guiding you through the process of buying disability insurance and determining whether you may require individual disability insurance coverage.
To schedule a consultation about your income protection goals, or if you have any questions about insurance in Ontario or Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia and Alberta including areas such as Waterloo, Guelph, Calgary, and Coquitlam.
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