Is Life Insurance Important for the Self‑employed?

These days, more and more people are choosing self‑employment over traditional employer/employee arrangements. However, when they do leave those corporate jobs, they typically lose their employer‑sponsored life insurance. For this reason, our advisors are frequently asked: now that I’m self‑employed, is it important that I have life insurance?

The answer is an emphatic yes. In fact, entrepreneurs tend to need life insurance more than conventionally‑employed people do—and more of it. That’s because, in addition to protecting their family’s financial future, they have an obligation to ensure the survival of their business. A special form of life insurance—key person insurance—does just that.

Two Policies, Two Purposes

Let’s assume that you’re self‑employed and want to provide income protection for your family in the event something happens to you. In addition, you want to ensure that your company can keep functioning successfully without you.

Many financial advisors will tell you that the smart, simple way to accomplish both of those goals is to secure two separate life insurance policies, each with its own beneficiaries and purpose. Both policies could be whole life, universal life, or perhaps term life policies—or they could be different. Either way, most likely you’ll need:

A Personal Life Insurance Policy – Created with your family in mind, this policy would replace your lost income in the event of your death. Your family could use these funds to pay the mortgage, fund your children’s college tuition, etc. You would pay the policy premiums from your personal bank account and designate your family members as beneficiaries.
A Key Person Life Insurance Policy – Created with your business in mind, this policy would safeguard the company’s finances against the loss of its “key person”—you. The business would pay the policy premiums from its corporate bank account and would be its designated beneficiary.

What Key Person Insurance Can Protect

Although self‑employed people have more independence than conventionally‑employed people do, they usually have more obligations to numerous people and entities, including:

Family members who work in the business or stand to inherit it
Business partners, if applicable
Employees who depend on the company for their livelihood
Customers/clients who rely on the business to provide them with agreed‑upon goods and services
Creditors, including lenders, banks, suppliers and service providers

Key person insurance can ensure that the business can honor all of these commitments by:

Paying employees’ salaries so the business can continue to operate
Covering day‑to‑day expenses
Compensating for lost profits
Paying off outstanding debts
Hiring and training a replacement leader

In short, key person insurance ensures business continuity after a loss—either until the business can get back up to speed or until it can be sold.

Additional Benefits of Key Person Insurance

Key person insurance benefits entrepreneurs in other ways, too. For example, it increases the confidence of creditors and investors, because it demonstrates that the business can repay its debts in the event of the principle’s death.

And should a self‑employed person take on a partner, key person insurance can play an essential role in crafting a buy‑sell agreement. These agreements can ensure the family is compensated for its share of the business—while facilitating a smooth transfer of ownership to the surviving partner.

Key Takeaway

If you’re self‑employed, one of the best moves you can make to protect your loved ones and your business is to obtain life insurance policies crafted to meet these separate, specific purposes.

Enlisting the guidance of an insurance advisor can help you make the best decision, based on your individual situation and business.

At Pan‑American Life Insurance Group, we offer a range of quality life insurance solutions. Ask our highly‑trained advisors for information about individual life insurance, key person insurance or both.

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This article has been prepared for informational purposes only, and is not intended to provide personal or financial advice. You should consult your own professional advisor with respect to your personal situation. Some products may not be available in every jurisdiction where Pan‑American Life is licensed to do business. All products are subject to exclusions and other applicable terms and conditions.