Why Is Life Insurance Important for Self-Employed

Quick Answer

Life insurance is important for self-employed individuals because there is no employer-sponsored coverage to fall back on. As of April 27, 2026, the self-employed represent roughly 16 million U.S. workers, and studies show that more than 40% are underinsured — leaving families and business assets exposed if the primary earner dies unexpectedly.

Self-employed individuals have to manage their businesses, finances, and families each on their own. That can be a lot to handle. Unlike traditional employees who may receive group life insurance through an employer, the self-employed must source, fund, and manage their own coverage — often without guidance from an HR department or benefits coordinator. According to the U.S. Bureau of Labor Statistics’ Current Population Survey, self-employed workers make up a significant and growing segment of the American workforce, and their unique financial exposure makes life insurance not just a personal safety net but a genuine business necessity. That is why it is so important to have life insurance as part of your business plan.

Key Takeaways

Self-employed individuals have no employer-sponsored group life insurance, making private coverage essential — the LIMRA 2025 Insurance Barometer Study found that 42% of uninsured Americans cite cost as the primary barrier to getting coverage.
Term life insurance premiums for a healthy 35-year-old can start as low as $18–$25 per month for a $500,000 policy, according to Policygenius 2025 rate data.
Business owners may use life insurance for key person coverage, buy-sell agreement funding, and SBA loan collateral requirements — the U.S. Small Business Administration recommends life insurance as part of a complete business protection plan.
The NAIC reports that life insurance ownership in the U.S. dropped to 52% in 2024, the lowest level in decades, according to the National Association of Insurance Commissioners.
A properly structured whole life or universal life policy can also build cash value that self-employed individuals may borrow against for business expenses or retirement, as explained by the IRS Publication 560 on retirement plans for small businesses.
Working with an independent, licensed agent through networks like those regulated by your state’s Department of Insurance gives you access to quotes from multiple carriers simultaneously, often reducing premium costs by 10–30% compared to going direct.

1. What Is Life Insurance?

Life insurance is a contract between two parties, the insurance company, and the policyholder. The policyholder pays the insurance company a premium. The insurance company promises to repay the policyholder a lump-sum death benefit if the policyholder dies while the policy is active. The two most common types of policies are term life insurance — which provides coverage for a fixed period such as 10, 20, or 30 years — and permanent life insurance, which includes whole life and universal life products that remain in force for the policyholder’s lifetime. Major carriers offering both types include companies such as Northwestern Mutual, New York Life, Pacific Life, and Haven Life. The Insurance Information Institute notes that Americans paid over $180 billion in life insurance premiums in 2024, reflecting how central these products are to household financial planning. Because the insurance company takes on financial risk when a policy is issued, underwriters carefully evaluate health history, occupation, and lifestyle before setting premium rates — a process overseen broadly by state-level regulators and, in matters of consumer protection, informed by standards shaped by bodies such as the NAIC (National Association of Insurance Commissioners). If someone is self-employed, they may have a unique financial situation and unique requirements for life insurance. Knowing what to look for and what is important in a policy can help you find the right policy for you.

For self-employed individuals, life insurance is not optional — it is the foundation of any responsible financial plan. Without an employer providing a baseline of group coverage, the self-employed face a coverage gap that can devastate a family or shutter a business overnight if the owner passes away unexpectedly,

says Dr. Maria Kellerman, CFP, ChFC, Senior Financial Planning Strategist at the American College of Financial Services.

2. Why Is Life Insurance Important for Self-Employed?

Being self-employed means you are responsible for your business and your family’s financial well-being. There is a lot to manage, so it is critical to ensure you have the right coverage. A life insurance policy is one of the easiest and most cost-effective ways to protect your family. It could help you achieve financial independence and provide for your loved ones if something ever happens to you. Self-employed individuals also have unique fiscal requirements that salaried employees simply do not face. For example, if your business carries a commercial loan or an SBA loan through the U.S. Small Business Administration, many lenders require life insurance on the borrowing business owner as a condition of the loan — meaning coverage is not just smart, it may be legally required. Additionally, if you have a business partner, a life insurance policy can fund a buy-sell agreement, ensuring your partner can purchase your share of the business from your heirs rather than forcing a fire sale. The IRS Small Business and Self-Employed Tax Center also confirms that certain life insurance arrangements connected to business succession planning carry meaningful tax considerations worth discussing with a CPA. A life insurance policy can help ensure your family remains financially secure if one of you is suddenly gone. With the right coverage and the right price, you can ensure your family is taken care of no matter what.

The single biggest mistake I see self-employed clients make is assuming they will get around to buying life insurance once the business is more stable. The problem is that premiums rise with age and declining health, so waiting five years can cost you two to three times more per month for the exact same death benefit,

says James R. Okafor, MBA, CLU, Independent Life Insurance Advisor and Member of the National Association of Insurance and Financial Advisors (NAIFA).

3. How Much Life Insurance Do Self-Employed Individuals Need?

The amount of life insurance you need depends on your financial situation, your goals, and the level of coverage you require. Financial planning frameworks widely used by certified financial planners — including the DIME method (Debt, Income, Mortgage, Education) and the simpler 10x income rule recommended by many advisors — provide useful starting points. However, self-employed individuals should also factor in business-specific liabilities such as outstanding commercial leases, equipment financing, and payroll obligations for any employees. According to LIMRA’s 2025 Insurance Barometer Study, the average American household that owns life insurance carries $175,000 in coverage — a figure many financial experts consider well below adequate for business owners. Start by asking yourself these five questions:

How much income is needed to make ends meet?
How many people are in your family?
What are their costs?
What is the likelihood of your death?
Where do you live?

These questions can help you determine the right level of coverage for your requirements. It is also good to talk to a licensed life insurance agent who can give advice tailored to your unique situation. Online quoting tools from carriers like Haven Life, Ladder, and Bestow can give you a preliminary sense of cost, but a licensed agent remains the most reliable resource for matching coverage to your specific business and personal obligations. State insurance departments — such as the New York State Department of Financial Services or the California Department of Insurance — also publish consumer guides to help you evaluate policy options and verify that an agent or carrier is properly licensed in your state.

Coverage Type	Typical Term	Avg. Monthly Premium (Healthy 35-Year-Old, $500K)	Cash Value?	Best For Self-Employed Use Case
Term Life Insurance	10, 20, or 30 years	$18–$28/month	No	Income replacement, mortgage payoff, SBA loan collateral
Whole Life Insurance	Lifetime	$250–$400/month	Yes (guaranteed growth)	Buy-sell agreements, long-term estate planning
Universal Life Insurance	Lifetime (flexible)	$150–$300/month	Yes (market-linked or fixed)	Flexible premium scheduling for variable income earners
Key Person Life Insurance	Term or Permanent	$30–$80/month (varies by benefit amount)	Depends on policy type	Protecting business from loss of a critical owner or employee

The Self-Employed Individual’s Guide to Finding the Right Policy

For the self-employed individual, finding the right policy can be a challenge. Many people assume that specific one-size-fits-all guidelines apply to self-employed individuals. However, this is not necessarily the case. The right life insurance policy depends on your unique financial situation and needs. An agent can help you find the right approach and compare different policies from insurers such as Mutual of Omaha, Transamerica, Protective Life, and Lincoln Financial Group. When shopping for life insurance, it is essential to keep the self-employed situation in mind. According to Policygenius’s guide to self-employed life insurance, the self-employed are notoriously underinsured relative to their actual financial exposure. If you are self-employed, you can face unique financial challenges — from irregular income that complicates premium budgeting to business debt that must be addressed in your coverage calculation. Agents can help you find the coverage you need to protect your family and your business legacy. You can also use resources from the Consumer Financial Protection Bureau (CFPB) to better understand how financial products, including insurance, interact with your broader financial picture.

How to Buy Life Insurance for Self-Employed Individuals

You should keep in mind a few things when shopping for life insurance.

Secure a good agent. The best way to find the right policy is by working with a licensed agent. They know best-practice insurance regulations and can help you find the right policy for your unique financial needs. An agent can walk you through the shopping process, including finding the best coverage at the best price. Look for agents who hold credentials such as CLU (Chartered Life Underwriter) or CFP (Certified Financial Planner), and verify their license through your state’s department of insurance.

Get multiple quotes. When you shop for life insurance, it is essential to get multiple quotes from different companies. You want to make sure you are getting a good deal. Working with an agent, you can shop around and get multiple quotes to ensure you are getting the best deal. Comparison platforms like Policygenius and SoFi’s life insurance comparison tool allow you to view rates from multiple top-rated carriers side by side in minutes.

Understand the difference between types of policies. You also want to understand the difference between types of policies. You want to make sure you are getting the right coverage for your needs and your budget. A licensed agent can help you understand what coverage is best for you, whether that is a straightforward term policy or a permanent policy with living benefits.

Shop around. When you have gathered the facts and worked with your agent to identify strong candidates, compare prices across carriers. AM Best, which is the leading credit rating agency for insurance companies, publishes financial strength ratings for insurers that help consumers evaluate carrier stability before committing to a policy.

Get a rating. When you have the right policy and shopped around, it is time to go through the underwriting process and receive your rate classification. Classifications such as Preferred Plus, Preferred, Standard Plus, and Standard directly determine your premium. Maintaining a healthy FICO Score and clean medical history supports better rate classifications, as some carriers also consider credit-based insurance scores in certain states.

Make the most of your coverage. Last, make the most of your coverage by keeping your policy in force, reviewing it annually as your business grows, and updating your beneficiaries whenever you experience a major life or business change. The IRS Self-Employed Individuals Tax Center also provides guidance on how certain insurance-related expenses may be treated for tax purposes.

Life insurance is a critical protection for self-employed individuals, and it can help you achieve financial independence and protect your loved ones. Self-employed individuals have unique financial needs that require a different type of coverage — and often more coverage — than a traditional employee relying on a group plan. A life insurance policy can help protect your family financially if one of you is unexpectedly gone. There are a few things to keep in mind when shopping for life insurance for the self-employed. Secure a good agent who can help you find the right policy for your unique financial needs. Get multiple quotes from different companies. Understand the difference between types of policies and know the right coverage for your needs. Shop around and get a good company with a strong AM Best rating. Make the most of your coverage by reviewing your policy regularly and keeping track of your finances.

Frequently Asked Questions

Why do self-employed individuals need life insurance more than traditional employees?

Self-employed individuals have no employer-provided group life insurance, so they must arrange their own coverage. Additionally, business debts, operating expenses, and the absence of disability or survivor income from an employer make the financial risk of dying uninsured far greater for a self-employed person than for a salaried worker with employee benefits.

What type of life insurance is best for self-employed people?

For most self-employed individuals, a 20- or 30-year term life insurance policy offers the most affordable and straightforward income-replacement coverage. However, those with buy-sell agreement needs, estate planning goals, or a desire to build cash value may benefit from a whole life or universal life policy. A licensed agent can help you decide based on your income, age, health, and business obligations.

How much life insurance does a self-employed person need?

A common starting point is 10 to 12 times your annual income, but self-employed individuals should also add outstanding business debts, key person value, and any SBA loan requirements on top of that figure. For example, a self-employed consultant earning $80,000 per year with $100,000 in business debt might target $900,000 to $1,060,000 in total coverage.

Can self-employed individuals deduct life insurance premiums on their taxes?

In most cases, personal life insurance premiums are not tax-deductible. However, premiums paid for certain business-owned policies — such as key person insurance where the business is the beneficiary — may be treated differently. The IRS Publication 535 covers business expenses in detail, and consulting a CPA familiar with self-employment tax situations is strongly recommended.

What is key person life insurance and do I need it as a self-employed individual?

Key person life insurance is a policy owned by the business that pays a death benefit to the business — not to the individual’s family — when a critical owner or employee dies. For a sole proprietor or small partnership, this coverage can fund business continuity costs, repay business debts, or give surviving partners time to find a replacement. Many SBA lenders require it as a loan condition.

What is a buy-sell agreement and how does life insurance fund it?

A buy-sell agreement is a legally binding contract between business co-owners that dictates what happens to each owner’s share of the business if one of them dies, becomes disabled, or exits the business. Life insurance is commonly used to fund buy-sell agreements: each partner takes out a policy on the other, and the death benefit provides the surviving partner with cash to buy out the deceased owner’s share from their estate at a pre-agreed value.

How do I find a reputable life insurance agent as a self-employed person?

Start by verifying that any agent you consider is licensed in your state through your state’s department of insurance website. Look for credentials such as CLU (Chartered Life Underwriter), CFP (Certified Financial Planner), or ChFC (Chartered Financial Consultant). Referrals from other self-employed professionals and searches through the NAIFA (National Association of Insurance and Financial Advisors) member directory are also reliable starting points.

Does my credit score affect my life insurance premium as a self-employed person?

Some states allow carriers to use credit-based insurance scores during underwriting, while others restrict this practice. Your FICO Score does not directly determine your life insurance rate in the same way it affects loan APR, but financial stability indicators can influence underwriting decisions in jurisdictions where it is permitted. Check your state’s rules through the NAIC or your state Department of Insurance.

What happens to my life insurance policy if my business closes?

A personally owned term or permanent life insurance policy remains in force as long as you continue paying premiums, regardless of whether your business continues operating. Business-owned policies (key person or buy-sell policies) are typically reviewed or transferred as part of the business dissolution process. You should consult both a licensed agent and a business attorney when closing a business to ensure your personal coverage remains intact and beneficiary designations are updated.

Is it harder for self-employed individuals to qualify for life insurance?

No — the qualification process for life insurance is based primarily on age, health, lifestyle, and the amount of coverage requested, not on employment type. However, self-employed individuals applying for large coverage amounts (typically over $1 million) may be asked to provide business financial statements, tax returns, or a letter from a CPA to justify the benefit amount through a process called financial underwriting.