Life Insurance For Self-Employed Canadians: A Complete Guide

Being self-employed comes with many advantages like setting your own hours and being your own boss. However, it also comes with some unique financial challenges compared to traditional employment. One of the biggest differences is access to benefits like employer-sponsored life insurance. For self-employed Canadians, getting adequate and affordable life insurance requires some extra planning and effort.

In this guide, we’ll explore the ins and outs of life insurance for self-employed individuals specifically. Whether you’re just starting your own business or you’ve been self-employed for years, read on to understand why coverage is so important and how to choose the right policy for your needs.

Why Life Insurance Matters for Self-Employed Canadians

There are a few key reasons why life insurance is especially important for self-employed workers compared to traditionally employed individuals:

Provide for Family in Case of Death

A life insurance policy pays out a lump sum of money to your beneficiaries if you pass away. For most self-employed Canadians, this means providing a financial safety net for dependent family members. The payout can help cover expenses like:

• Mortgage payments and household bills
• Childcare and education costs
• Paying off debts and loans
• Final expenses like funeral arrangements

Without a steady paycheck, the impact of losing the primary income earner can be devastating for families. Life insurance lessens that blow.

Pay Off Business Debts and Expenses

If you have outstanding business loans, bills, or other financial obligations, life insurance provides funds to pay those off. This ensures your business assets don’t get caught up in estate battles or risk seizure from unpaid debts.

Life insurance can also provide operating capital to keep your business afloat until any assets can be liquidated or operations transferred to successors or partners.

Fund Buy-Sell Agreements

For self-employed Canadians with business partners, a buy-sell agreement is essential for protecting the company. This legal contract dictates what happens to a business owner’s shares if they retire, become disabled, or die.

Life insurance can provide the funding to purchase a deceased partner’s shares. This allows surviving owners to take control and ensure a smooth business transition.

Replace Lost Income

Your income funds your lifestyle and financial goals. For self-employed individuals, a sudden loss of that income can be difficult to absorb. Life insurance provides tax-free funds to continue supporting your family at the same standard of living.

Term life policies with living benefits can also provide income if you become disabled before death. This protects your income if you are unable to work.

What Types of Life Insurance Policies 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 For The Self-Employed

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

• Lower premiums, making it the most affordable life insurance
• Can match the term length to a specific need, like paying off a business loan
• Provides temporary coverage when need is highest

Cons

• Coverage expires at the end of the term
• Renewal rates increase as you age
• No cash value accumulation

Permanent Life Insurance For The Self-Employed

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

• Lifelong coverage
• Cash value accumulation
• Stable costs
• Loans and withdrawals from cash value

Cons

• 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.

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.

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.

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:

1. Total debts

Add up any debts that life insurance should cover, like mortgages, business loans, credit cards, lines of credit, and car loans.

2. Future costs

Estimate future expenses like:

• Child’s education
• Elder parent care
• Household costs
• Spousal retirement needs

Account for inflation, too.

3. 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:

• 10–12 times your salary
• 70–80% income replacement

4. Business expenses

Factor in any business debts, payroll, taxes, contracts, leases, and operational costs to keep your business running if you pass away.

5. Final expenses

This includes funeral arrangements, medical bills, and estate administration costs. Budget about $5,000 to $15,000 or more.

6. 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 locks in affordable premiums for your entire coverage term. This avoids having new health developments later in life drastically increase your costs. It also eliminates 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.

For self-employed Canadians, buying life insurance early on is one of the smartest financial moves. Work with an advisor to appropriately increase your coverage as your family and business grows over the years.

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.

Full review: Life Insurance Rates By Age Chart in Canada

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.

Full review: How to Find the Best Life Insurance Broker in Canada

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.

Taxation of Life Insurance for Self-Employed Canadians

One benefit of life insurance is certain tax advantages. Here are some key tax implications:

Premium payments

Premiums are typically not tax deductible for self-employed individuals unless specific circumstances apply like using life insurance in place of an RRSP for retirement savings.

Death benefit payout

The death benefit your beneficiaries receive from your life insurance is not considered taxable income.

Cash value growth

For permanent life insurance policies, the growth in your cash value account is tax-deferred. You don’t pay tax on this growth each year.

Policy withdrawals and loans

Withdrawing money or borrowing against your policy cash value will trigger taxes owed on a portion of the amount.

Corporate-owned life insurance

Premiums paid by an incorporated business on policies insuring employees, owners, or creditors of the business can be tax deductible as business expenses.

For high net worth individuals, there may also be additional estate tax considerations depending on the total value of your assets and life insurance death benefit.

Overall, life insurance provides some valuable tax advantages compared to other investment vehicles. Consult with accounting and tax professionals to implement strategies that maximize these benefits.

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.

How To Find The Right Life Insurance Company As A Self-Employed?

Choosing the right insurance company for your policy as a self-employed Canadian comes down to a few key factors:

Financial Strength Ratings

Select an established insurer with strong financial standing and credit ratings from agencies like A.M. Best, Standard and Poor’s, and Moody’s. This gives confidence they’ll be able to pay out claims down the road.

Range of Product Options

Look for a company that offers both term and permanent policies with flexibility to meet your evolving needs and risk profile over time.

Policy Underwriting

Insurers have varying underwriting criteria and requirements. Find one that is competitive and appropriate for your age and health status.

Customer Service Reputation

You’ll want an insurer that offers streamlined application and claims processes along with responsive, knowledgeable customer support.

Cost Comparison

Be sure to compare premium costs across insurers for the same coverage amounts. Significant cost differences can exist.

Independent Broker Accessibility

Select an insurer that allows you to work with and access quotes through independent brokers or advisors. This opens up more options.

Research insurers across these criteria with help from an experienced insurance broker. While cost is important, a slightly higher premium may be worthwhile for stronger claims payment reputation, product selection, and service reliability.

Recommended Companies for Self-Employed Canadians

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 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.

Full review: 20 Largest Life Insurance Companies in Canada

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. Check out our guide for Life Insurance for High Risk Occupations in Canada and other helpful sources:

• Life Insurance for Teachers in Canada
• Life Insurance Options for Doctors in Canada
• Life Insurance for Firefighters in Canada
• Life Insurance For Police Officers in Canada
• Life Insurance for Truck Drivers in Canada
• Life Insurance for Scuba Divers 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.

We hope this guide has helped provide clarity and direction for self-employed Canadians. Don’t leave your family’s future and your business success up to chance. Consult with a professional life insurance advisor at Lifebuzz to review your specific situation. Get expert guidance tailoring a policy to your needs, priorities, and budget. With the right life insurance plan in place, you can focus on doing what you love – running your own business.

Frequently Asked Questions (FAQs)

Article Sources:

Gain insight into our unwavering dedication to accurate and transparent reporting with a focus on editorial independence by perusing the Editorial Policy of Lifebuzz.ca. Our pride in being recognized as the most reliable source

1. Life Insurance for Self-Employed People – https://www.cpp.ca/
2. Why Get Life Insurance as a Self-Employed Worker – https://protectyourwealth.ca/
3. Life and Health Insurance for Self-Employed Canadians – lifeinsurancecanada.com