If you’re self-employed, applying for life insurance is a little bit different than it would be if you were working a traditional full-time job with benefits. If you’re an independent contractor, freelancer, or gig worker, your total income will determine how much coverage you can get. Also your need for benefits like life insurance will be different from some of your peers.
We’ll explain how to determine your insurance needs and shop for a policy when you have a fluctuating income.
How much life insurance do flexible workers need?
John Harris, senior sales associate at Policygenius, suggests people aim for a total amount of life insurance coverage equal to 10 to 15 times their income.
For gig economy workers, this recommendation may not be sufficient. If your gig is your only form of employment and not a supplemental income source, you may want to consider purchasing additional life insurance that would also cover any outstanding debts your family would be left with when you die, such as a car loan, mortgage, or student loans.
Most insurance companies will let you apply for up to 40 times your income, depending on your age.
“Regardless of whether you are employed by an employer or you are an independent contractor or file a 1099-MISC form, life insurance companies can use your past year's earned annual income as justification for purchasing a life insurance policy,” adds Policygenius sales associate Jordan Schreer.
That means if, for example, you reported $40,000 of net income to the IRS in 2022, you can apply for any amount of life insurance up to $1.6 million (or up to 40 times your income) depending on your age in 2024 (though you probably don’t need that much).
The maximum amount of life insurance you can apply for based on your salary will vary by insurer. A licensed agent can help make sure you get the coverage you need, while keeping the cost within your budget.
Calculating how much life insurance you need
The amount of coverage you need will not only depend on your income, but also on your savings, loans, and other expenses. A good rule of thumb is to use the DIME method to determine how much life insurance coverage you need:
Debts. Calculate the total amount of debt you have. Rideshare drivers may need to account for a car loan.
Income. Determine your annual income and apply for 10 to 15 times that amount to provide for your family financially if you die. Self-employed freelancers and gig workers may have multiple sources of income, so it’s important to add up everything to get an accurate picture. People with cash-only revenue streams such as food industry workers earning tips should account for that income as well.
Mortgage. Determine how much you have left on your mortgage. You can insure this amount so your family can pay off your home when you die. Vacation and homestay rental hosts may have larger mortgages to factor in.
Education. Think about how much your children’s education will cost. You can also factor in other expenses you expect to pay during your lifetime in this amount.
How to shop for life insurance
Once you’ve calculated how much life insurance you need and decided what type of policy you need, the next steps are easy.
Collect the documents you need to get started, including proof of income, residency, identity, citizenship, and age.
Shop around for a life insurance policy by comparing quotes from multiple insurance companies.
Complete the application and phone interview.
Get a medical examination, if needed.
Wait for the insurer to come back with a coverage offer.
Sign the documents and pay for your policy.
You don’t need to calculate your total coverage needs on your own. An agent can help you discuss your options and go through the application process with you to get the coverage you need at the best possible rate.
The best life insurance policy for freelancers
Term life insurance is the best option for most people, including flexible workers, looking to protect their income and provide their family with a financial safety net to cover any debts in the event of their death — including a mortgage or any other types of personal loans.
Term life offers more coverage for less money compared to other types of insurance. It also expires after a set period of time when you no longer need life insurance. You can even reduce or even cancel your policy if your coverage needs to change.
How much does life insurance cost?
A healthy non-smoker 35-year-old can expect to pay $29 per month for a 20-year term life insurance policy with a $500,000 death benefit payout, according to the Policygenius Life Insurance Price Index.
Life insurance premiums increase depending on five main factors: your age, gender, health, hobbies, and policy type. The larger the death benefit, the more you’ll pay for a term policy.
How your job affects your life insurance rates
A high-risk job that poses a risk to your health or safety can impact how much you pay for life insurance. Rideshare drivers or Airbnb hosts shouldn’t be affected, but other part-time workers (including bartenders) could see rate increases depending on the type of work.
The following jobs may affect how much you pay for life insurance:
Building and construction workers
Electric powerline construction and maintenance workers
Fishing industry workers
Lumber industry workers
Marine industry such as deckhands or sailors
Mining and quarrying workers
Oil and natural gas industry workers
A high-risk job might also disqualify you from purchasing some life insurance riders, such as a disability income rider. Riders are policy add-ons that provide supplemental coverage under special circumstances.
But if you receive high life insurance premiums due to your work and later change jobs or quit your flexible gig, you can ask your insurer for reconsideration or apply for an entirely new life insurance policy.
Is life insurance tax deductible if you’re self-employed?
If you’re self-employed, you can usually deduct health insurance premiums or other business expenses. Unfortunately, life insurance doesn’t work the same way and premiums are not tax-deductible.
There is a rare exception to this if you own your own business and offer life insurance as an employee benefit. Certain types of business owners can deduct premium payments they make for their employees. This can apply to LLCs, S corporations, and sole proprietorships.
There are several additional exceptions and regulations, so if you’re a typical freelancer or gig worker, this type of tax deduction is unlikely to apply to you.
Beyond shopping for life insurance, we recommend full-time gig workers set up a private benefits package that includes health or disability insurance and retirement savings accounts, to mimic traditional workplace perks.