Life insurance can play a vital role in financial security for the loved ones of those left behind. Yet, many self-employed individuals may not fully understand their coverage options or have difficulty obtaining coverage due to their self-employment status.
When an earner passes away, the death benefit from the insurance policy can serve as a safety net for dependants. This financial support can help cover mortgage payments, business debts, tuition fees and more, alleviating the burden on the family during an emotionally challenging time.
Challenges Faced by Self-Employed Individuals
Navigating the complex landscape of life insurance can be particularly challenging for self-employed individuals. Their fluctuating income due to the seasonality of the business or changing market conditions may make regular premium payments seem difficult. There is often the perception that it’s too expensive, and many are unaware of the range of life insurance products available. In the paragraphs below, we investigate life insurance options for self-employed individuals and how to overcome potential difficulties.
Irregular income streams can complicate securing certain insurance products. Providers may require income verification to justify the coverage amount, particularly for products like long-term disability insurance.
Being self-employed means you likely won’t have access to group life insurance, a single policy typically covering company employees. Because the risk is spread over many people, group life insurance can be obtained at a lower cost and without a medical exam. While it’s more challenging to get insured, you can consider applying for an individual life insurance policy. If your business has several employees, you can set up a group insurance plan for your business, allowing you to also participate in the program.
Insurance companies usually base their coverage and premium rates on the applicant’s health status. Individuals with pre-existing conditions such as diabetes, heart disease, or cancer, are generally considered higher risk because they’re more likely to require medical care or have a shorter life expectancy. A self-employed individual with a history of heart disease might face higher premiums or even be denied coverage because of the increased risk of a heart attack or stroke.
The nature of an applicant’s occupation also plays a role in risk assessment. Certain occupations are considered riskier due to increased chances of accidents or illnesses. Examples of high-risk occupations include pilots (particularly those flying small aircraft), loggers or forestry workers who use heavy machinery, miners exposed to hazardous conditions and toxic gasses, and roofers prone to falls and equipment accidents.
Life Insurance Options for Self-Employed Individuals
Term life insurance is a type of life insurance that provides coverage for a predetermined period, often 10, 20, or 30 years. If the policyholder dies within this term, their beneficiaries receive a death benefit. Term life insurance policies generally have lower premiums. This allows policyholders to buy higher coverage amounts to protect their beneficiaries during crucial years, such as raising a family or paying a mortgage.
However, if you outlive that term, your policy expires, and you’re no longer covered. To continue coverage, you’d have to renew the policy or purchase a new one, often at a significantly higher cost due to increased age or changed health status. Unlike some types of life insurance, term life insurance doesn’t accumulate any cash value. You’re buying pure life insurance protection. You should ensure the death benefit is sufficient to support your beneficiaries’ needs by factoring in all financial obligations and ongoing living costs.
Permanent life insurance provides coverage for your entire lifetime as long as premiums are paid, offering peace of mind to your beneficiaries. This includes whole life, universal life, and variable life insurance policies. For many of these policies, a portion of your premium goes into a cash value account that grows over time. In many cases, this cash value can be borrowed against, withdrawn for emergencies, or used to pay premiums. It may also be an effective way to accumulate tax-advantaged savings.
Premiums sometimes remain level for the life of the policy, making budgeting easier, as you won’t have to worry about rising costs as you age, or if your health declines. You should be prepared for a long-term financial commitment to fully benefit from a permanent policy. Cashing out early could lead to a loss. It is important to consider whether you can afford the ongoing premiums before buying a policy.
Simplified issue life insurance is a policy designed to streamline the application process, making it quicker and easier for individuals to obtain coverage. These policies generally do not require a medical exam, which is often an appealing feature for those with pre-existing medical conditions. While simplified issue life insurance may not require a medical exam, it does typically involve a health questionnaire. It’s crucial to answer these questions honestly and accurately. Misrepresentation could result in policy cancellation or a denied claim.
Life Insurance Options for Self-Employed Individuals
Determining the right life insurance coverage as a self-employed individual can be crucial to your financial planning. To help make this determination, tally all your existing debts, including mortgage, credit card balances, personal loans, and business debts. Then deduct resources such as savings, investments, life insurance, and any other assets that could be used to support your dependents or clear debt. You may also wish to consider future financial obligations, such as your children’s education expenses or your spouse’s retirement needs. Don’t forget to factor in potential inflation, since the cost of living will likely increase over time.
The premiums should align with your current and foreseeable future budget. Being self-employed may make your income more unpredictable than those with steady salaries. Budgeting conservatively is essential –consider periods of lower income when determining what premium you can afford. Life insurance costs increase as you age, so securing a policy when you’re young and healthy can help you lock in a lower rate.
The policy duration should ideally cover the length of your major financial obligations. Choosing between term and permanent life insurance often depends on your specific financial needs, goals, and timeline. For instance, if you’re self-employed and have taken out loans to grow your business, a term life insurance policy could provide a financial safety net, protecting your business or family from the debt burden. A permanent life insurance policy may be more suitable for lifelong financial protection. Life isn’t static, and your insurance needs may change over time. Regularly review your policy to ensure it’s still the best fit for your current circumstances and future goals.
Reach out to one of our knowledgeable CPP insurance advisors to discuss your unique needs as a self-employed professional. We are leading providers of No Medical2 and Simplified Issue Life Insurance. Schedule a consultation today.
- 1 Foresters and Canada Protection Plan (CPP), and their employees and life insurance representatives, do not provide, on Foresters behalf, financial, estate, legal or tax advice. The information given here is merely a summary of our understanding of current laws and regulations. Clients and prospective purchasers should consult their financial, estate, tax or legal advisor regarding their situation.
- 2 Insurability depends on answers to medical and other application questions and underwriting searches and review.
422138 CAN (08/23)