As a self-employed freelancer you already know the importance of health insurance, and to look at it as investment in your future (and your family’s future). We no longer have the luxury of a boss who can help pay our premiums. We are responsible for protecting ourselves in case of emergencies and health issues.
But what about life insurance?
Is life insurance really necessary as a self-employed business owner?
According to a recent survey by State Farm, only 42% of Americans with living parents have talked about their life insurance plans as a family. And with the rise of freelance businesses and self-employed taxpayers, this difficult topic is one that’s even more important.
Ideally, you want to find the answer to this question before a tragic event happens, and since September is Life Insurance Awareness month, take a few minutes to evaluate your insurance needs as an individual and business owner.
Types of life insurance
There are two types of life insurance available; term and permanent.
Term life insurance, is relatively simple. You sign up for a policy that will cover you for a certain period of time (say 20 years) and as long as you pay the premiums, your family will receive the policy benefits in the event of your death.
Term is a good option for businesses who have partners with a retirement date fast approaching, or for a self-employed business owner who just needs a modest amount of coverage for the security of their family. It’s relatively inexpensive (based on your health and age) and the benefits will be paid to your heirs when you pass away.
Whole life insurance (also called permanent), consists of both an insurance and investment component, giving it a cash value element. Unlike a term life insurance policy, you won’t lose the equity your premiums have built up when the term has ended.
Even in the policy lapses you can still walk away with your investment, and when you pass away, your beneficiaries will receive the death benefits as well as the investment built up in the account. The downside, however, is that the premiums are much higher and more costly than term life insurance.
While both of these options are good in their own right, it’s important to evaluate your needs and to purchase life insurance coverage that fits. I personally have term life insurance since I prefer to keep my investing and savings goals separate in order to simplify my finances.
Here are 3 very important things to consider before purchasing life insurance as a business owner:
1. Your family
The first thing to consider is what your family needs. Are you an older or younger couple? Do you have children, or heirs who will depend on your income when you’re gone? Does your family survive on a single income, or do both spouses work outside the home?
Do you have a mortgage or other large assets that need to be paid off? Do you have other investments that will be transferred when you die? Unless one choice fits all your needs, and depending on your budget, it may be a smart decision to do a mix of both term and whole life insurance.
2. Business structure
There are multiple reasons your business needs insurance coverage; to protect the investors and for income replacement. With the right insurance in place your spouse or business partners will have enough capital to continue running the business while you’re gone.
If there’s an unexpected death, life insurance is commonly used to buy out other partners’ shares or equity in the company. The funds can also be used to close the business and start a new one, or to invest the funds elsewhere in order to provide a steady income for the remaining partners.
It is vital, however, that the business is registered as a limited liability company, or LLC, from the beginning because this separates the owner’s personal finances from the company’s.
Having things separated gives your family options, since they might not have to use the money they receive from your life insurance to keep your business afloat. Of course, this depends on the personalized operating agreement that you create when you register as a limited liability company.
As a result, you should make sure that you consider the possibility of a sudden death when creating these provisions.
3. How much coverage
The amount of life insurance coverage you need will depend on the answers to the first two questions. Some other important factors to consider are; how much debt you and your business have, your total income and future expenses, as well as the structure of your business.
Check out State Farm’s life insurance calculator to get an estimate of how much coverage you need. You don’t want to overpay and get too much coverage, just like you don’t want a policy that’s too small.
Take your time researching possible insurance agents and only work with established companies and representatives who have a good reputation. If the insurance agent is being overly pushy, find someone who you feel more comfortable with. Life insurance policies are products, so your agent will make a commission off your purchase.
In any case, don’t put off buying life insurance as a self-employed business owner. Whether you have business partners or a spouse who’s your biggest fan, you want your loved ones to be taken care of when you’re gone.