How to Handle Life Insurance When You're Self-Employed

Self-employed workers need life insurance but lack employer benefits — here's how to buy coverage and make it work for your business.

1. Calculate how much coverage you actually need. Multiply your annual income by 10-12 times as a starting point, then add any business debts your family would inherit. If you earn $75,000 annually, start with $750,000 to $900,000 in coverage. Add extra if your income is the primary household source or if you have young children who need 15-20 years of support.
2. Gather income documentation before you apply. Collect your last two years of tax returns, profit and loss statements, and bank statements showing business income. Insurance companies will verify your income since they won't insure you for more than 20-25 times your annual earnings. If your income varies significantly year to year, they'll use an average.
3. Choose between term and permanent life insurance. Term life insurance costs $300-800 annually for $500,000 of coverage for a healthy 35-year-old, but expires after 10-30 years. Permanent life insurance costs $3,000-6,000 annually for the same coverage but builds cash value you can borrow against. Most self-employed people should start with term unless they need permanent coverage for estate planning.
4. Shop directly with insurers or use an independent agent. Independent agents can compare policies across multiple companies and understand self-employment income verification. Direct applications work if you have straightforward income documentation. Avoid captive agents who only sell one company's products — they can't show you better options elsewhere.
5. Consider business-related coverage needs. Buy additional coverage to pay off business loans or provide transition funds if your business dies with you. If you have business partners, explore buy-sell agreements funded by life insurance. Don't buy life insurance through your business entity unless you understand the tax implications — personal ownership is usually simpler.
6. Set up automatic payments and review annually. Life insurance lapses if you miss payments, and you can't always restart coverage at the same price. Set up automatic payments from a business or personal account with steady cash flow. Review your coverage annually when your income changes significantly — you can often increase coverage without new medical exams if it's been less than two years.