- Without an employer policy, you start from zero and must cover your whole protection need yourself.
- Include personally guaranteed business debts when calculating coverage.
- Expect to document income with tax returns, and consider a buy-sell agreement if you have partners.
If you work for yourself, nobody hands you a benefits package. There is no group life insurance, no HR department and often no safety net beyond what you build. That makes getting life insurance right more important, and a little more complicated, than it is for an employee.
Why self-employed people often need more coverage
A salaried employee may have a small employer-provided policy as a starting point. A freelancer, consultant or business owner usually has nothing. If your family depends on your income, the whole need falls on a policy you buy yourself. In addition, your income may be what keeps a business running, so losing you could affect both household finances and the company. Use the DIME method in our coverage guide and calculator as a starting point.
Sizing coverage with irregular income
- Use an average. If your income varies, average the last two or three years rather than your best year.
- Think about replacement, not revenue. What matters is the income your family relies on, not your business's gross sales.
- Add the household work you do. If you also manage the home or childcare, include a cost for replacing it.
Business debts count
If you personally guaranteed a business loan, signed for a line of credit, or co-signed a lease, those obligations may survive you and land on your estate or your family. They belong in your coverage calculation next to your personal debts. See life insurance and debt for how different debts are treated after death.
Proving your income
Insurers want to confirm that your coverage amount is reasonable for your income. Without pay stubs, they typically ask for recent tax returns, often two years, and may request business financial statements for larger amounts. Keeping organized records and filing consistently makes this smoother. If your income is new or volatile, a lower initial amount may be easier to get approved, and you can add coverage later.
If you have a business partner
A buy-sell agreement is a legal contract that sets out what happens to a co-owner's share if they die. Life insurance can fund it: each owner holds a policy, or the business does, and the death benefit lets the surviving owner buy the share from the family at an agreed price. Without a plan, the family may inherit a stake in a business they cannot run, or the survivor may face a forced sale. An attorney and accountant should draft and structure this.
Key person coverage
If a business depends heavily on one individual, the company can buy a policy on that person. The payout helps cover lost revenue, recruitment of a replacement and debts while the business adjusts.
Personal or business-owned?
For protecting your family, a personally owned policy with your family as beneficiaries is usually simplest. Business-owned policies can make sense for buy-sell and key person needs. The tax treatment differs, so check with an accountant. Premiums for personal policies are generally not deductible. See is life insurance taxable?
Do not forget disability
For many self-employed people, the bigger financial threat is not death but being unable to work. Disability income insurance is a separate product that replaces part of your income if you are ill or injured. A waiver of premium rider on your life policy can keep it in force if you become disabled. See riders explained.
A starting plan
- Calculate your family's needs and add personally guaranteed business debts.
- Get term quotes, and have two years of tax returns ready.
- Name beneficiaries carefully. See how to choose a beneficiary.
- If you have partners, talk to an attorney about a buy-sell agreement.
- Review coverage every year as your income changes.