Being self-employed comes with many advantages, including flexible scheduling, being your own boss, and the potential for higher income. However, it also means you are solely responsible for your financial protection. Unlike traditional employees, you don’t have access to employer-sponsored benefits. This makes securing personal life insurance more than an optional expense; it’s the essential safety net that allows you to pursue your passions with peace of mind.
Why Life Insurance Matters for Self-Employed Canadians
Self-employed Canadians face unique financial vulnerabilities. As a self-employed individual, your income may fluctuate, and your business might have debts, and the absence of “key people” like you would end operations. In addition, unlike traditional employees who receive group life insurance through their employers, you must independently secure protection for your families and businesses.
Here is why life insurance is essential for the self-employed:
Personal Protection
This is the traditional purpose of life insurance. If you were to pass away, a life insurance policy provides a tax-free lump sum to your beneficiaries (e.g., your spouse, children). This money ensures your family can:
- Replace your lost income to cover daily living expenses.
- Pay off the mortgage and other personal debts.
- Fund your children’s education.
- Cover final expenses and funeral costs.
Business Protection
By structuring a policy correctly, you can use it to ensure the survival and stability of your business. This is often called “business life insurance,” but it’s crucial to understand that this is not a separate type of product. It is the strategic application of standard life insurance policies for business continuity, succession, and financial health.
If you have a business partner, a Buy-Sell Agreement funded by life insurance ensures the surviving partner can buy out your heirs, giving your family cash and the partner full control.
What Types of Life Insurance Are Available For Self-Employed Canadians?
When choosing life insurance, you’ll come across two main categories: term life insurance and permanent life insurance. Within each category, there are also several types of policies.
Term Life Insurance
Term life insurance provides coverage for a set period of time, typically ranging from 10 to 30 years. Your coverage expires at the end of this term unless you renew your policy.
Some of the most common term policies include:
- Annual renewable term: The policy lasts one year and must be manually renewed each year. Premiums often increase annually as you age.
- Level term: The premium remains the same for the length of the term, often 10 to 30 years. This helps stabilize your budget.
- Decreasing term: The death benefit decreases over the term as your financial needs shift. This lowers premiums.
- Increasing term: The death benefit increases over time to match your growing financial obligations. Premiums are higher.
| Pros | Cons |
|---|---|
| – The most affordable – Can match the term length to a specific need, like paying off a business loan – Provides temporary coverage when need is highest | – Coverage expires at the end of the term – Renewal rates increase as you age – No cash value accumulation |
Permanent Life Insurance
Permanent life insurance covers you for life as long as you pay the premiums. It also builds cash value that you can borrow against.
Some common types of permanent life insurance include:
- Whole life: Offers guaranteed death benefit, fixed premiums, and minimum cash value growth.
- Universal life: Flexible premiums, adjustable death benefit, and cash value growth linked to interest rates.
- Variable universal life: Combines the premium flexibility of universal life with investment options of variable life.
| Pros | Cons |
|---|---|
| – Lifelong coverage – Cash value accumulation – Stable costs – Loans and withdrawals from the cash value | – More expensive than term life insurance – Missed premium payments can cancel your policy – Less death benefit per premium dollar |
For self-employed Canadians, permanent life insurance can provide lifelong coverage to protect your family and business interests well into retirement. It also offers unique investment benefits. But the higher premiums make it harder to justify for younger buyers who need more affordable protection.
Choosing Between Individual vs. Group Life Insurance
In addition to the major categories above, the life insurance market is also segmented into individual and group policies:
Individual life insurance is purchased directly from a life insurance company. You undergo medical underwriting, which reviews your health history and other factors to set rates. The policy only covers you as the individual owner.
Group life insurance is employer-based coverage for a company’s employees. The employees don’t have to undergo individual underwriting. The premiums and coverage amounts are set for the entire group.
Advice: As a self-employed Canadian, your only option may be to pursue individual coverage since you won’t have access to an employer-sponsored group plan. However, some professional associations and non-profit groups also offer group life insurance rates for members. This can help you land more affordable coverage.
Essential Add-Ons for the Self-Employed
Life insurance only pays if you die. For entrepreneurs, the risk of disability or illness is statistically higher and equally devastating.
- Disability Insurance: Replaces a portion of your income if you cannot work.
- Business Overhead Expense (BOE): A specialized rider that pays your business rent, utilities, and staff salaries while you are disabled.
- Critical Illness Insurance: Provides a tax-free lump sum if you are diagnosed with a covered condition like cancer or a heart attack.
How Much Life Insurance Should Self-Employed Canadians Have?
Determining the right life insurance coverage amount depends on your unique financial situation and needs. Here are some steps to calculate the optimal amount:
Total debts
Add up any debts that life insurance should cover, like mortgages, business loans, credit cards, lines of credit, and car loans.
Future costs
Estimate future expenses like:
- Child’s education
- Elder parent care
- Household costs
- Spousal retirement needs
Account for inflation, too.
Income replacement
Consider how much income your family would need to maintain their current lifestyle if you were to pass away. Industry rules of thumb suggest:
- 10 to 12 times your salary
- 70 to 80% income replacement
Business expenses
Factor in any business debts, payroll, taxes, contracts, leases, and operational costs to keep your business running if you pass away.
Final expenses
This includes funeral arrangements, medical bills, and estate administration costs. Budget about $5,000 to $15,000 or more.
Assets and savings
Subtract any existing life insurance coverage, savings, investments, and assets your family could leverage if you were to die. This offsets some of the above costs.
Follow these steps and work with an experienced insurance advisor to select the right amount of life insurance coverage for your specific situation as a self-employed Canadian. Be sure to periodically re-evaluate this amount as your business and financial needs evolve.
Securing Coverage When You’re Young and Healthy
The best time to secure life insurance is when you’re young and healthy. In your 20s and 30s, premiums are significantly lower because the chances of you passing away are much smaller compared to later decades.
In addition, the older you get, the more likely health conditions and lifestyle factors will emerge. Life insurance companies will require medical exams to uncover any issues as part of underwriting. Even minor health problems like elevated cholesterol can bump your premiums. Buying life insurance when you’re young lessens the chances of becoming uninsurable if a serious illness emerges.
Furthermore, purchasing life insurance early in your career allows the death benefit to grow in line with your income and financial obligations. As you earn more, have kids, and accrue assets, you can raise your coverage amount accordingly. But doing so later in life results in much higher premiums than if you had secured higher insurance when you were younger.
The Income Verification Process: Tips for Self-employed Canadians
This is where many self-employed Canadians get stuck. Insurance companies typically look at your Line 15000 (Total Income) on your T1 Tax Return.
Pro-Tip: If you use aggressive tax write-offs to lower your taxable income, the insurer may offer you a lower coverage amount. To combat this, be prepared to provide:
- Two years of Notices of Assessment (NOAs).
- Internal financial statements (Balance Sheets and Income Statements).
- Contracts or proof of recurring revenue.
Finding Affordable Life Insurance as a Self-Employed Canadian
Life insurance costs can vary widely. But there are a few key steps self-employed individuals can take to land affordable coverage:
Compare quotes from many insurers
Rates differ between insurance companies, so shopping around is crucial. It also allows you to compare policy features to find one that best fits your needs.
Consider group life insurance
Securing group coverage through a professional association provides lower rates since the risk is pooled across members.
Look for flexible underwriting policies
Some insurers offer simplified underwriting with fewer health questions, making approval faster and easier.
Work with an experienced advisor
An independent life insurance broker or advisor has access to quotes from many insurers. They can identify affordable options and negotiate optimal pricing on your behalf.
Maintain a healthy lifestyle
Limit behaviours like smoking that increase health risks and your premiums.
Bundle with other policies
You may get a discount if you bundle your life insurance with other coverage like disability or critical illness insurance.
Pay premiums annually
Opting for annual premium payments rather than monthly instalments can earn you a discount of 5-10% per year.
Review options regularly
As new life insurers enter the market, more affordable options may open up. Review your coverage every few years for potential savings.
Using Life Insurance for Investment and Retirement Planning
Permanent life insurance policies allow self-employed Canadians to enjoy strong investment benefits in addition to lifelong coverage. The cash value that accumulates can supplement retirement savings and other financial goals.
Some key ways to utilize life insurance for investment purposes include:
- Build up the cash value which grows on a tax-deferred basis to fund retirement income needs. The funds can be accessed tax-free through withdrawals and policy loans.
- Take advantage of fixed interest rates offered through some whole life insurance policies to earn guaranteed returns, providing stability even during market downturns.
- Invest your policy’s cash value into stocks, bonds, mutual funds, and other approved securities for potentially higher growth compared to traditional guaranteed options.
- Use dividends from participating whole life insurance policies to purchase additional coverage known as paid-up additions, maximizing the death benefit over time.
- Leverage policy loans from the cash value to finance major purchases or business investments without needing to sell other assets or borrow funds elsewhere.
- Pass on the tax-free death benefit to beneficiaries as an estate planning strategy, potentially avoiding taxation on investment gains that would otherwise apply.
Work closely with a financial advisor to integrate life insurance into your overall investment portfolio and retirement plan. Permanent coverage can provide security through liquidity, risk mitigation, and leveraging tax preferences.
Find The Right Life Insurance Company As A Self-Employed
Some life insurance companies that are highly rated for serving self-employed individuals include:
- Sun Life Financial: Offers flexible individual life insurance policies with options to bundle disability or critical illness insurance. Provides access to group rates through associations.
- Manulife: Features customized programs for entrepreneurs and professionals. Strong reputation for knowledgeable advisors and customer service.
- RBC Insurance: Competitive pricing across a range of term and permanent insurance options. Renowned claims payment ability provides peace of mind.
- Canada Life: Wide selection of individual and business life insurance solutions. Also provides access to investment services to grow your assets.
- iA Financial Group: Specializes in simplified underwriting policies with fast approval. Ideal for self-employed buyers in a hurry.
Leverage an experienced life insurance broker to access many top-tier providers and find the right fit based on your needs as a self-employed Canadian. The broker can negotiate preferred pricing and guide you through policy details.
In addition to the self-employed, certain occupations or professions may have unique life insurance needs and challenges. When shopping for life insurance, it’s important to consider how your profession or career impacts your options, costs, and needs. Consulting with an experienced advisor can help navigate any specialty concerns based on your occupation. But first, check out our guide to Life Insurance for High Risk Occupations in Canada.
Protect Your Family and Business Today with Life Insurance
Life insurance plays a vital role in the financial plans of self-employed Canadians. It can provide tax-efficient investment benefits while also offering peace of mind through reliable protection.
Yet sorting through the range of insurers, policy types, and coverage options presents challenges for busy entrepreneurs. By understanding key considerations like when to purchase insurance, how much you need, where to find affordable rates, and how to choose a provider, you can secure the ideal coverage.
FAQs on Life Insurance For Self-Employed
What options are available for life insurance for self-employed applicants with pre-existing conditions in Canada?
Simplified issue life insurance provides an option for self-employed individuals with minor health conditions to obtain coverage through streamlined underwriting. Approval is not guaranteed however.
Where can a self-employed person learn more about buying life insurance for self-employed in Canada?
There are many online resources and independent insurance brokers who can provide extensive guidance specific to purchasing life insurance as a self-employed individual in Canada.
Why should life insurance for self-employed be part of a financial plan for self-employed Canadians?
It provides crucial income replacement, debt payment, business continuity funding, estate planning, and tax-advantaged investing benefits in the event of untimely death.
When is the optimum time for a self-employed Canadian to buy life insurance for self-employed?
Experts strongly advise getting coverage as soon as one becomes self-employed to lock in lower premiums and ensure continuous financial protection.
Do independent brokers offer advice on finding affordable life insurance for self-employed rates in Canada?
Yes, an experienced independent broker can provide guidance on securing very competitive life insurance rates for self-employed Canadians by comparing quotes across insurers.
Can applying for life insurance for self-employed in Canada be a complicated process?
An independent broker simplifies the application process by advising on the most suitable policy types for your needs, required documents, financial details, and guiding you through medical underwriting.
Is owning life insurance for self-employed optional or absolutely essential for self-employed individuals?
Due to the risks of loss of income and other obligations, experts consider life insurance to be essential for almost all self-employed people to protect their family and business finances.
What are the tax implications if my corporation owns my life insurance for my self-employed policy?
Unlike personally owned policies, death benefit payouts from life insurance owned by your corporation may be considered taxable income for beneficiaries. Consult a tax advisor.
Can an independent broker help a self-employed person find the most cost-effective life insurance for self-employed?
Yes, an experienced independent broker has expertise in securing very competitively priced life insurance tailored specifically to meet the needs and budget of self-employed individuals.
Does being self-employed affect eligibility for life insurance for self-employed in Canada?
Yes, the underwriting process typically involves more financial scrutiny for self-employed applicants related to income stability. Pre-existing conditions also raise eligibility issues.
What are the pros and cons of buying term vs. permanent life insurance for self-employed in Canada?
Term life is affordable but expires. Permanent insurance is costlier but provides lifelong coverage and tax-advantaged savings potential. An independent advisor can explain the tradeoffs.
Will my family have to pay tax on pay life insurance for self-employed death benefits in Canada?
If the policy is personally owned, the tax-free death benefit can help secure your family's financial future. Payouts from policies owned by a corporation may be taxable.
Can life insurance for self-employed help fund a buy-sell agreement for self-employed business owners?
Yes, life insurance is an effective way to fund a buy-sell agreement that allows remaining owners to purchase a departing partner's shares in the event of their death.
What medical tests may be required to qualify for life insurance for self-employed as a self-employed Canadian?
Requirements range from simplified issue health questionnaires to comprehensive medical exams depending on health, age, coverage amount and type of policy. An advisor can explain requirements.
Is it possible for a self-employed person to get life insurance for self-employed with no medical exam in Canada?
Yes, simplified issue life insurance involves only health questions, not an actual exam. However, approval is not guaranteed, and coverage amounts are lower than those of more comprehensive policies.
Can life insurance for self-employed help self-employed Canadians supplement retirement savings?
Yes, the tax-deferred cash value growth within permanent life insurance policies can supplement RRSP and TFSA retirement savings.
What causes are most likely to result in a denial of life insurance for self-employed applicants?
Serious pre-existing conditions like cancer, heart disease, and hazardous occupations or activities often lead to life insurance denials for self-employed applicants.
How often should a self-employed Canadian review their life insurance for self-employed needs and coverage?
Experts recommend reviewing needs and policies at least annually whenever major life events occur or following significant business changes.
