Choosing the best type of life insurance is critical for long-term financial stability. One of the benefits I was most excited about that came with my first job was the life insurance package. At age 21, my life insurance coverage was three times my salary and ran into low six figures. Having that potential security in case anything happened to me was deeply reassuring.
Since I left corporate benefits behind, I’ve remembered how that security felt. Now, with a husband and people who rely on my income for paying the bills and planning for the future, life insurance is even more important to me. Unfortunately, as a freelancer, decoding life insurance coverage is challenging. Here’s a guide to thinking about the best type of life insurance for you.
Understanding Life Insurance Options
Life insurance is a common benefit, and most freelancers who started out by working for a traditional employer had some type of group policy. Group policies are attractive, because they’re typically free or low in cost. The total coverage is tied to your compensation and may or may not adequately address your family’s financial needs if you suddenly passed away. The best types of life insurance for freelancers provide maximum flexibility. Factors to consider include:
- The total amount of coverage you will have, which can range from just $10,000 (or even less) on the low end to upward of $1 million or more on the high end.
- Who the beneficiaries of the policy will be.
- A realistic understanding of your needs and financial big picture.
- The term of the policy; for example, if you purchase a policy at age 40, and it’s good for 40 years, what happens if you live to 90?
These are just some factors you need to figure out. Luckily, freelancers often feel comfortable with ambiguity and can navigate these tough conversations about the future with a practiced eye.
Three Rules and How They Play out Across Scenarios
There are three rules to choosing the right life insurance policy for you:
- Determine who you’ll give it to and what they’ll need.
- Determine how much of an impact the loss of your income, support, domestic services and other tasks will “cost” the household to replace in real terms.
- Decide what you can afford to pay.
Scenario one: Jennifer is a young writer who recently graduated from college. Her freelance work for agencies and clients averages around $40,000 per year, which she mostly spends on housing, going out and saving for the future. She does have a car loan and a student loan that her parents cosigned, meaning they’re on the hook if anything happens to her. For Jennifer, a good amount might factor in the debts that could pass to her parents as cosigners, plus enough in funds to cover her final arrangements. If she owes $5,000 on the car, $10,000 in student loans and anticipates a $10,000 funeral, then a $25,000 policy should prove inexpensive and cover all the immediate financial needs.
Scenario two: Jennifer is now a 40-something mother of four. She’s continued to succeed as a writer, bringing home approximately $100,000 per year. Her husband also works and makes about the same. The two of them have a mortgage and car payments, which require both their incomes, plus they need to pay for their kids’ college, plan for retirement and more. In this instance, experts at Kiplinger suggest that life insurance totals should look ahead. Could her spouse pay off the mortgage and cars without her? Put the kids through school? Would Jennifer’s early passing require her husband to pay a caretaker more or scale back his own work to be with the children? Often, 7–10 times your annual income is a starting point, but you should refine this figure based on your actual needs and plans for the future.
Special Considerations for Freelancers
Getting life insurance as a freelancer isn’t much different than purchasing a private policy for any citizen. There are some special conditions to consider:
- You’ll need to provide tax returns for a couple of years to prove your income, which is the starting point for the conversation around policy maximums.
- Has variable income created long-term deficits in your family’s finances that you’d like to set right? For example, if you weren’t able to contribute to a 529B program for school or save enough for retirement, that may argue for higher levels of coverage.
- Freelancers can easily scale their income by taking on more work to meet a specific financial goal, such as purchasing a house. Do you and your partner or family intend on relying on that strategy to accomplish a goal?
- What fits your budget? For example, a $1 million policy may be out of your financial reach, but a $500,000 term life plan might be an excellent choice. Be realistic about what you can do now to secure as good a future as possible.
- Work with a broker who can help you understand the value of different policies and how different factors, such as waiting periods, term life plans versus whole life plans and other factors impact the premiums. You can find a wide variation in the amount of coverage you want between companies; shopping around yields the best results.
As freelancers, we’re often comfortable with ambiguity. However, thinking about the best types of life insurance for freelancers can ensure your family has a certain level of security in the unlikely event that something happens to you. In today’s fast-evolving benefits market, you can definitely purchase an excellent life insurance policy at a reasonable premium.