Life Insurance for Self-Employed Individuals

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Types of life insurance

Life insurance provides your loved ones a financial safety net upon death. Like most financial products, life insurance comes in different forms, offering various life insurance options, and every type has pros and cons. Knowing how each type works will help you pick the best policy for your unique situation.

There are four main types of life insurance: term life insurance, whole life insurance, universal life insurance, and burial insurance. As a self-employed professional, you’ll have access to all of them.

Term Life Insurance

How it works: Term life insurance covers you for a set period. This period is called the “term” of your policy or simply the “policy term.” The most popular term lengths are 10, 20, and 30 years. The longer the policy term, the higher the premium. Most people pick a term long enough to cover their prime years. That way, in the event of their untimely death, the death benefit can help their surviving spouse meet their family’s financial needs until their children become financially independent. 

Best for: Term life insurance is a good choice for most people. It is affordable, easy to maintain, and replaces your income when you pass away. 

Pros: Its premiums are cheaper than other types of life insurance. 

Cons: If you survive the policy term, your policy will not pay out.

Whole Life Insurance

How it works: Whole life insurance offers life insurance coverage for your entire life. It also accumulates cash value, which you can withdraw or borrow anytime. The cash value grows at a fixed rate on a tax-deferred basis. Your policy’s death benefit and premium rate remain the same throughout. 

Best for: People who want permanent life insurance cover and don’t mind paying extra. 

Pros: It combines permanent coverage with an investment component and is easier to understand than universal life insurance. 

Cons: Premiums can be up to 10 times higher than term life insurance. 

Universal Life Insurance 

How it works: Universal life insurance provides lifetime coverage and builds cash value. However, cash value doesn’t grow at a fixed rate, and often, you can adjust the size of your premium payments (within limits). 

Best for: People who need a permanent life insurance policy that is more flexible and offers better cash value growth potential than whole life. 

Pros: It is less expensive than your whole life and allows you to adjust as your circumstances change. 

Cons: The cash value growth and death benefit are not guaranteed.

Burial Insurance

How it works: Also known as guaranteed issue life insurance, it provides a small death benefit to help your family pay for funeral expenses and end-of-life expenses. The policy covers you for your entire life. 

Best for: People who don’t want to burden their family with funeral costs or cannot qualify for other types of life insurance. 

Pros: It doesn’t require a medical exam or a health questionnaire, so acceptance is almost guaranteed. 

Cons: The death benefit is usually capped at $25,000, and if you pass away within two years of buying the policy.

Critical Illness Insurance: Additional Protection

Self-employed individuals can consider this to provide financial security in the event of a serious illness. This type of insurance provides a lump sum payment if the policyholder is diagnosed with a critical illness, such as cancer, heart attack, or stroke.

Critical illness insurance payouts can be used to cover expenses related to medical treatment, rehabilitation, and other associated costs. They can also help replace lost income, pay off debts, and maintain a standard of living during a challenging time. This type of insurance can be a crucial financial safety net for self-employed individuals who may not have access to other benefits.

When selecting a critical illness insurance policy, self-employed individuals should consider several factors to ensure they get the right level of protection. These factors include the types of illnesses covered, the coverage provided, the premium costs, the waiting period before benefits are paid, and the policy’s exclusions and limitations. By carefully evaluating these aspects, self-employed individuals can choose a policy tailored to their unique needs and circumstances, providing additional financial security.

How to Determine Your Life Insurance Needs?

Life insurance experts recommend evaluating how much life insurance coverage you need, typically suggesting at least 10 times your annual salary. However, this recommendation may not be sufficient for freelancers and business owners. If you are a full-time freelancer, you may need additional life insurance cover, particularly if you have debts that will pass to your estate.

Consider business debts when evaluating your life insurance needs, as the death benefit can help cover these financial obligations, ensuring the business can continue operations and that the economic fallout of a sudden loss does not burden dependents. Purchasing additional coverage shouldn’t be a problem since most insurance carriers allow applicants to buy up to 40 times their income.

Income, however, is not the only factor you should consider when determining your coverage needs. Take into account your savings, debts, and other expenses as well. A useful guideline is to apply the DIME method to determine the coverage amount that will provide sufficient financial support to your family:

• Debt: Add up all the loans you have, excluding mortgage. If you are a full-time rideshare driver, don’t forget to include your car loan.
• Income: Multiply your annual income by the number of years your family would need support after your death.
• Mortgage: Calculate your mortgage balance. Vacation rental and homestay owners will likely have larger mortgages to consider.
• Education: Estimate how much it would cost to send your children to school and college.

How Much Does Life Insurance Cost?

The cost of life insurance for self-employed individuals depends on the type of insurance, death benefit amount, and coverage period (for term life plans). For instance, a 35-year-old female nonsmoker will pay roughly $42 monthly for a 10-year, $1 million term life plan. In comparison, the same policy will cost $50 for a 35-year-old male who doesn’t smoke. 

Key factors that affect the cost of life insurance premiums include: 

• Age: Your life insurance premium rate increases as you get older. 
• Gender: Men typically receive higher premiums than women.
• Health: Pre-existing conditions may raise your premiums, especially if they are severe or poorly managed. 
• Smoking status: Smokers pay up to two or three times higher premiums than nonsmokers
• Occupation: A high-risk job can mean paying more for life insurance coverage. Freelance writers or rideshare drivers shouldn’t be impacted, but those working in the construction or lumbering industry could see an increase in their premiums. 
• Type of policy: Permanent life insurance plans — such as universal life and whole life — are costlier than term life insurance. 

Can Life Insurance be Used as Collateral for a Business Loan?

Yes, you can use life insurance as loan collateral. In fact, many lenders will approve a business loan only if you own a life insurance policy and assign all or part of it as collateral coverage. 

Here’s how it works: Typically, permanent life insurance plans are used as collateral. This is because they provide coverage for your entire life. You buy a permanent life insurance policy, make the premium payments, choose your beneficiary — such as your spouse — and designate the lender as the assignee. 

Until the loan is paid, the lender has collateral assignment — which gives the lender the first claim to the death benefit — of your policy. If you pass away before paying off the loan, the insurer first pays the outstanding balance to the lender from the proceeds of your policy. Only then will the remaining death benefit be handed to your beneficiary. The collateral assignment gives the lender confidence that they will get back their money no matter what. It ends only if you repay the loan or pass away.

Conclusion

Not having life insurance could leave your dependents vulnerable. Not only would they face financial hardship if you die, but they might even be forced to use your savings and assets to pay off debts. Since self-employed people don’t have access to group life insurance, buying adequate personal life insurance coverage is crucial. The good news is that you don’t have to navigate the world of life insurance alone. Reach out to one of our Dundas Life advisors. We're here at every step to answer your questions and compare rates so you can find the right policy at a great price. 

Frequently Asked Questions (FAQs)

How does a self-employed individual’s age impact life insurance?

Life insurance costs are primarily based on your age. The younger you are, the more affordable your premiums will be. On average, life insurance costs go up 8% to 10% for every age. 

How do I determine the beneficiary of my life insurance policy if I’m self-employed?

You can name any person or entity as your beneficiary. Who you should designate as your beneficiary depends on your reason for buying life insurance. Are you taking out a policy to secure your spouse’s or children’s financial future? If so, naming your spouse as the beneficiary is a good idea. You must designate a beneficiary; otherwise, the insurance proceeds may not go to the person you want to receive them from. 

Is life insurance tax-deductible for self-employed individuals?

Typically, life insurance is not tax-deductible for self-employed persons. The CRA treats life insurance costs as non-deductible personal expenses. But suppose you own a business and offer your employees life insurance. In that case, you can deduct premiums as a business expense if neither you nor your company is named the beneficiary on the policy. 

Is life insurance payout taxable? 

Life insurance proceeds received in a lump sum are not subject to tax. However, if your beneficiary receives the payout in installments, they will pay tax on the interest. 

Do you need proof of income for life insurance? 

If you are self-employed and applying for life insurance, the insurer will likely ask for income information. Life insurance companies typically use your last year’s earnings to determine the maximum coverage you can buy.