How to buy life insurance when you’re self-employed

If you are self-employed, a gig economy worker, or a freelancer, you can benefit from term life insurance.

The ongoing global pandemic has led to an increase in flexible employment as people have turned to gig work and freelancing after being displaced from traditional corporate jobs. With decreased job security, the safety net of a life insurance policy can give you and your loved ones much-needed peace of mind during these difficult times. Although group life insurance hardly offers enough coverage for people with families or other dependents, it still provides some level of protection and is worth opting into. But where do you begin if you’re self-employed and shopping for a standalone life insurance policy of your own?

Whether you’re supplementing your income or taking advantage of the gig economy full-time, shopping for life insurance is a little different when you’re an independent contractor. We’ll explain how to shop for a policy when you have flexible income and how much life insurance coverage you need. 

Key Takeaways

  • Insurance companies use your past year’s earnings to determine how much life insurance you qualify for

  • Experts recommend 10-15x your income in life insurance, but you can apply for as much as 40x your income

  • You’ll pay more for life insurance if your job involves high risk, such as mining or lumber working

How much life insurance do flexible workers need?

Nicholas Mancuso, the senior operations manager of Policygenius' advanced planning team, suggests people aim for 10-15 times their income. But that doesn’t mean you can’t get a higher face value if you don’t make a ton of money. If your gig is your only form of employment and not a supplemental income source, you may want to consider purchasing additional life insurance to cover any outstanding debts your family would be stuck with when you die, such as a car loan, mortgage, or student loans

“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 2020, you can apply for any amount of life insurance up to $1.6 million (or up to 40x your income) depending on your age in 2021 (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. 

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. To determine how much life insurance coverage you need:

  1. Add up your resources (after-tax income and liquid assets, such as cash, checking and savings accounts)

  2. Combine your expenses + debt to get your financial obligation

  3. Subtract your resources from your financial obligation to determine your coverage gap (financial obligation - resources = coverage gap)

  4. Your coverage gap is a good indicator of how much life insurance you should get (plus an additional sum to ensure a financial cushion)

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 of your coverage gap. Rideshare drivers may need to account for a car loan, while vacation and homestay rental hosts may have larger mortgages to factor in. People with cash-only revenue streams such as food industry workers earning tips should account for that income as well. 

→ Learn more about how much life insurance you need  

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. 

How to buy life insurance:

  1. Collect the documents you need to get started, including proof of income, residency, identity, citizenship, and age

  2. Shop around for a life insurance policy by comparing quotes from multiple insurance companies 

  3. Complete the application and phone interview

  4. Get a medical examination

  5. Wait for the underwriting results

  6. Sign the documents and pay for your policy

Compare the market, right here.

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What type of policy is best for freelancers?

Another consideration when shopping for life insurance: how much coverage can you comfortably afford? 

Affordability depends a lot upon the type of life insurance. The main two types of life insurance are term life insurance and whole life insurance

Term life insurance is the most affordable option for most people, including flexible workers. It offers more coverage for less money and it expires after a set period of time when you no longer need life insurance. 

Freelancers and gig workers should make sure their term life insurance policy has level premiums , meaning the amount you pay each month won’t fluctuate even if your income does. Luckily, level term life insurance is the most common type of term life insurance, but we recommend talking to a licensed agent or broker before you sign your policy if you’re unsure.

→ Compare whole and term life insurance

How much does life insurance cost?

Life insurance premiums increase depending on five main factors: your age, gender, health, hobbies, and policy type. The larger the death benefit (your policy’s face value amount), the more you’ll pay for a term policy.

→ Review 2021 life insurance rates and calculate how much your policy may cost

How your job can affect your life insurance rates

A high-risk job that poses a risk to your health or safety can greatly impact how much you pay for life insurance. Rideshare drivers or Airbnb hosts shouldn’t be affected, but other part-time workers (including bartenders) may see rate increases, depending on the type of work.

The following jobs may affect how much you pay for life insurance:

  • Active military

  • Aviation jobs

  • Bartenders

  • Building and construction workers

  • Electric powerline construction and maintenance workers

  • Fishing industry workers

  • Law enforcement workers

  • Lumber industry workers

  • Marijuana industry workers

  • Marine industry such as deckhands or sailors

  • Municipal and volunteer firefighters

  • 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. 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.

Do side-hustlers need private life insurance?

If you have a full-time job and work a part-time side hustle, you probably still need private life insurance too. Group life insurance policies, which some employers offer, provide only a small amount of coverage and generally don’t carry over if you leave the company. A private life insurance policy can help you fill any gaps from these types of policies, especially if you have current or future dependents who rely on your income.

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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

The exception: 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. 

Life insurance for flexible workers FAQs

What type of life insurance do you need if you are self-employed?

A term life insurance policy that outlasts your longest financial obligations and covers your income is the best life insurance option for most freelancers.

Is life insurance a business expense if you’re self-employed?

In most cases, no, life insurance premiums do not qualify as business expenses and cannot be deducted from taxes. Exceptions apply (with limits) for business owners offering life insurance for their employees.

How should flexible workers calculate their income?

If you work a side-gig or freelance job, you’ll need to add up all your revenue sources to get an accurate calculation of how much life insurance you need. Use your last tax return, bank statements, or other documentation to determine your whole financial picture.