Do You Really Need Life Insurance When You Are Self-Employed?
Financially and professionally, every self-employed, freelance solopreneur is out on a limb—it's your name, your brand, and your bank account at stake. As the saying goes, “Nothing ventured, nothing gained,” and risk is an essential part of every business venture.
But risk needs to be tempered and controlled whenever possible. That's why we buy insurance, to protect ourselves from the perils of unmediated risk. In the case of health insurance, your premiums amount to an investment, and the calculus is clear enough: inevitably, you or one of your dependents will need to see a doctor, and without health insurance, even basic care can cost a fortune.
Life insurance is the best way to protect and provide for your loved ones after you have passed on.
In other words, your health insurance pays for itself after one or two trips to the doctor.
But what about life insurance? Is it really necessary? After all, you're still relatively young, your health is good—you're not planning to check out anytime soon. Can't you skate by for a few more years?
Yet again, it boils down to risk and reward: if you skip the coverage, your family will not only need to find a way to pay the bills after you're gone, they will have to take on any outstanding liabilities associated with your business. Maybe they can manage, but if your debts are more than they can handle, how will they cope? Risk and reward: except now it's your loved ones hanging in the balance.
Time To Do Your Homework
Nobody likes to talk about life insurance. For one thing, it's the only insurance we buy that we ourselves will never benefit directly from. By the time we need it, we're already gone. But your family's financial future depends on your foresight, and life insurance is the best way to protect and provide for your loved ones after you have passed on.
First thing's first: evaluate your needs, personally and professionally. What will they need if you are gone? Tabulate your business debts, your mortgage payments, income for your family, college loans for your kids, money for them for a down-payment on a house, funds to start their own business—everything you hope to provide. This figure will help guide you as you search for policies.
As always, when it comes to purchasing insurance, it's in your best interest to shop around and compare quotes. Meet with agents in your area and ask what they can offer; some insurers will reduce your premium if you buy a package that includes both health and life insurance, while others may offer discounts to members of a trade group or professional organization.
An agent doesn't see a dime until you buy a policy. They want you to hurry up and buy whatever's on the table. Slow down! Make sure to have your contract inspected by a third party. And talk with your family to make sure that they understand the details of the plan. After all, they're the ones who will be dealing with the lawyers and agents.
Whole Life Vs. Term Life
Most financial planners strongly caution against buying permanent or “whole” life insurance. For comparison's sake, whole life is like buying a house and term is like renting one. With whole you build equity, but whole life plans are substantially more expensive than term life plans; in fact, premiums for permanent insurance can be ten to twenty times higher. And for many self-employed people, the benefits of permanent life insurance are negligible.
That's why in the insurance world, they say term life is bought while whole life is sold. Your agent and insurer stand to make a bundle if they can convince you to buy whole life. So why would anyone choose whole life insurance over term? Let's do a quick side-by-side comparison:
With term life coverage you pay monthly premiums for a period of time (the “term”), typically between 5 and 30 years. If you pass away while the policy is outstanding, then your beneficiaries receive a predetermined sum of money. A 30-year policy for 1 million dollars will cost a 25-year-old approximately $700 per month, depending on his or her health and habits.
After 30 years, the policy expires, even if the individual has not. At this point, a new term policy will be substantially more expensive—you're much more likely to pass away between 55 and 80 than during your 40s.
But if your primary motivation for purchasing life insurance is to guarantee against a loss of income for your family, then by the time your term expires, you may no longer feel the need to carry insurance. Retirees in their 60s and 70s often focus on savings and investments rather than insurance.
Whole life will cost the same 25-year-old solopreneur about $9,500 per year, more than 10 times the cost of term life. That's because whole life insurance includes an investment component that allows policy holders to take out loans against the value of their policy. The problem? Whole life “investments” take 10 or 20 years to generate any significant cash value.
So long as you continue to pay your premium every month, your beneficiaries will receive the full amount guaranteed by your policy—$1,000,000 in this scenario—but if you live to be 100, then you will have contributed fully three-quarters of the payout.
In the end, whole life is a useful resource for wealthy individuals who are essentially using their life insurance policy as a savings account to assist their families with paying estate taxes. For the majority of self-employed individuals, it is prohibitively expensive.
In the end, you want to find a policy you can more or less forget about. Pay your premiums, enjoy your life, and protect your family from undue risk without straining your budget. Trust me, you will sleep a whole lot better!