#SQinsurance: How Much Does Life Insurance Cost for Freelancers?

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What does life insurance cost as a freelancer? How much coverage do you need? Are the payouts taxable? These and other important questions are covered in this post about term life insurance for self-employed biz owners.

Life insurance for freelancers can be a confusing topic. We don’t have to luxury of having an employer pay for out-of-pocket expenses like health insurance, or contribute to our retirement accounts.

This is one of the downsides and added costs of being self-employed. But when it comes to life insurance at least, there are some nice budget-friendly options.

If you’re unsure of whether or not you need life insurance as a freelancer, here are 5 important questions you should ask. I also weigh in on my personal opinion as an experienced freelancer myself.

How does a life insurance policy work?

One important thing to remember about life insurance, is that you have to think about your family, not yourself. It’s coverage for your life so when you pass away your loved ones will be taken care of.

This is especially important if you’re the breadwinner and responsible for paying all of the bills.

When asking yourself whether or not you need life insurance, don’t think of it as a cost you’re paying on yourself, but instead something you’re doing for others when you’re not around to care for them anymore.

Here’s how it works: you choose between the different types of life insurance available (more on that below) and start paying a monthly premium for a specific amount of coverage.

The amount of this coverage is what your loved ones, called beneficiaries, will receive upon your death. And the monthly premium is the amount you pay in order to procure this policy coverage.

What is the best life insurance for freelancers?

There are two kinds of life insurance policies: term life insurance and permanent life insurance. Term is a much simpler form of life insurance that most freelancers will purchase (myself included). It’s also quite a bit more budget-friendly.

Permanent life insurance (also known as whole life insurance) is a bit more complicated and often costs much more than a term policy. But it could be a good answer for specific circumstances, so check with your life insurance agent to inquire about both types.

For the purposes of this article I’m focusing on term life insurance as it’s the more budget-friendly option for your freelance finances and gives the best coverage for the location independent lifestyle.

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Is life insurance a waste of money?

According to SelectQuote, who have been in business for over 30 years and has expertise in finding the lowest cost life insurance option, the correct amount of life insurance coverage as a freelancer is based off your current income with a multiplier of 7.5.

For example, if you earn $50,000 per year and multiply that times 7.5 you’ll need at least $375,000 in life insurance coverage to replace your income for your spouse to continue living comfortably.

This is the recommended bare minimum amount, so if you have a small family you may want to bump this up to a multiplier of 10. Based on the $50,000 example above, this would mean you’d need a $500,000 life insurance policy.

Term life insurance policies vary in length but can be purchased for a term of 10, 15, 20 or 30 years (thus why it’s called term life insurance!). Some other factors that come into account when purchasing term life insurance, include your personal health (whether you’re a smoker or not), your age and sex.

Depending on all those factors, you could pay an average of $14 per month for a $500,000 policy (as a female non-smoker who’s 35 years old). That’s a pretty good investment in my opinion!

So if you were to ask the question, “Is life insurance a waste of money?” I’d say “not at all”. It is a smart and financially sound expense for the peace of mind it can bring to you and your family.

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Are life insurance payouts taxable?

So what happens when you pass away and your loved ones receive the insurance policy payout? Do they have to pay taxes on the money they receive?

According to the IRS website, if you receive a payout from a life insurance policy as the beneficiary, due to the death of the insured person, the benefits are not taxable. Your loved ones will not have to include them on their tax return and the income does not have to be reported.

The only thing to be aware of is that if the funds earn any interest this money is taxable just like any other form of interest and must be reported on your loved one’s tax return. Obviously it’s important to check with your accountant if you are dealing with a life insurance payout, as some beneficiary payouts may be taxable if they are part of an estate.

Why is life insurance such a depressing topic?

While life insurance is often thought of as a depressing or sad topic, don’t view it with a negative mindset. As I mentioned in the beginning of this post, life insurance is for the benefit of others.

It’s for the people you love most, and should be thought of as a way of caring for them when you’re no longer around.

As a self-employed freelancer you do a lot to help provide for your family, and this is just another way to aid in their future security. You can even go as far as to request how they use the funds once you’re gone, and set up an investment vehicle for them to park the money until they need it.

Term life insurance can help your kids attend college, or pay for their first home through a Roth IRA. It can help your spouse retire sooner so they don’t have to work late into their retirement years.

In other words, life insurance is a selfless act, an expense that you take on for the advantage of someone else.

For a few dollars a month you can have peace of mind knowing that your partner and your kids are insured in the event of your untimely death. As a freelancer and breadwinner myself, I’m more than happy to pay for this small expense for the ones I care most about.

Do you have life insurance as a small business owner? What’s your hesitation about it?


In compliance with the FTC, this article was sponsored by SelectQuote but all thoughts and opinions are my own.