Being self-employed has lots of benefits. You’re in complete control of your work pattern and finances so you can work in a way that suits you best. Holidays are yours whenever you fancy and if you feel like clocking off early, no worries! But there are downsides to this freedom. As you’re employed by yourself, you’re responsible for filing your tax returns, guaranteeing the business runs smoothly, and making sure the bills get paid on time.
It also means you won’t be entitled to some of the same benefits which are given to employed people, including sick pay and death in service benefit. That’s why many self-employed people choose to have life insurance. Navigating the waters of self employed life insurance can be tricky though, so in this post, we’ll explore why life insurance for self employed people can be a great idea to guarantee peace of mind.
What is life insurance?
Although there are many reasons to take out life insurance self employed people may find that the most important factor influencing their decision is the desire to make sure that their family and loved ones are protected should the very worst happen. It’s comforting to know that your family would be taken care of in this case, especially important if you’re the main income earner in the household. Life insurance can help to provide this peace of mind, by paying out a cash lump sum, or regular monthly payments, in the case of death or terminal illness (generally for cases where patients are given less than 12 months to live).
Life insurance can help to support costs including:
Housing: This includes both the monthly cost of a mortgage or rent, as well as money to support paying bills.
Children’s education: If you’re a parent or carer, life insurance payouts can help to pay some of the costs of school and university.
Childcare, hobbies, and holidays: The average cost of raising a child from birth to age 18 in the UK is now £151,000 . Life insurance payouts can help to make sure that your family can still enjoy all of the things they love doing, including hobbies and holidays.
Funeral costs: It’s not nice to think about, but an average funeral in the UK using the services of a funeral director currently costs around £4000 . Removing this cost gives your family something less to think about at a difficult time.
Income: Depending on the type of policy chosen, you can also choose to provide a lump sum to children when they turn 18. If you’re a single parent, you can also choose to have insurance payouts go to a designated relative or friend to help with living costs if they look after your children.
You can also look at specific policies for parents and families which have different benefits attached.
Why should self employed people take out life insurance?
Paid maternity leave,
Sick pay: if you are self-employed you won’t be eligible to receive Statutory Sick Pay (SSP) as this is paid by an employer. You may be eligible to receive some government benefits but these can be impacted by your household circumstances including how much you have in savings.
Death in service benefit: this is a payment made to your dependents if you die during the term of your employment, usually providing around two to four times your salary depending on how long you’ve been employed.
If you were to pass away, it’s important to consider how your family would manage financially. This is especially relevant given the recent rise in the cost of living caused by increases in food, fuel, and inflation rates. A record 91% of UK adults reported that they had experienced a rise in their living costs between June and July 2022  and this is not expected to reduce for some time. Government support may be available in the form of benefits but the amount of savings you have may impact the amount you could be entitled to. Life insurance can take away this worry.
How does life insurance work if you’re self-employed?
Life insurance for self-employed people works in just the same way as it does for employed people. Firstly, you need to choose the type of cover you’d like, either term life or whole life (more on these below).
You’ll then need to decide how much insurance you will need. This depends on a number of factors including:
How much you’d like to pay in premiums: if you’d like your dependents to receive a higher payout if you die, then this will have a higher monthly cost.
The type of work you do: If you work from home, this would be considered a low risk employment so your premiums would be lower. If your self-employed job is working as a roofer or a tree surgeon, this would be viewed as a higher risk, and would come with a higher cost.
At this point, some insurance providers may ask you to have a medical examination. It is important to declare all information about any health conditions to your insurance provider to make sure that your cover is suitable.
If your family need to make a claim, they would then contact your insurer. Premiums are paid to a nominated person; quite often, this is a spouse or partner but could also be children.
What are the different types of life insurance for self-employed people?
There are two main types of life insurance, each with their own advantages and disadvantages: term life insurance and whole life insurance.
Term life insurance provides insurance for a specific amount of time (usually between five and twenty five years). It can be split into three further categories:
Level term life insurance: This type of life insurance is popular because it provides a set premium payout which doesn’t change throughout the length of your policy. Monthly payments also stay the same so you know exactly how much you’ll have going out (especially useful for self-employed people with a stricter budget). It can be great for families as it’s clear how much you can expect to receive after death, which can help you feel assured that all of the household bills will be covered. One downside, however, is that it does not keep pace with inflation, so in real terms a cash payout could be worth less later on in your policy.
Increasing term life insurance: Under this type of policy, your premium will increase annually throughout your term. This allows potential payouts to keep pace with rising living costs, but this does mean that you will face progressively larger payments throughout. These can be difficult to plan for, especially in the first years of being self-employed when your income may be a little more variable.
Decreasing term life insurance: A decreasing term life insurance policy can help to cover specific debts, such as mortgages (although not if you have an interest-only mortgage). Under this type of life insurance, you are still protected for the length of your term but the premium you would receive decreases each year. This type of life insurance can offer lower premiums which can be more affordable. It can also be a good option for those with longer left on their mortgages or younger children.
Whole life insurance policies, on the other hand, mean that you are protected from the point of buying the policy until death. Payouts are guaranteed and will remain the same throughout the length of your policy so you’ll always know how much your family will receive. Payments are made monthly or annually, or can even be made as a lump sum at the beginning of your term. This type of cover can also help to offset costs such as inheritance tax (but this depends on the type of policy).
Some policies also offer early payouts if you’re diagnosed with an illness which means you’re not able to take care of yourself, such as dementia. This type of life insurance can be less stressful as you don’t have to think about extending the term of your cover, as you might have to with a fixed term life insurance policy. It also gives your family a guaranteed payout amount.
Joint life insurance policies
It is also possible to take out a joint life insurance policy with another individual. Quite often, this is something that married couples might do, but it’s also suitable for business partnerships, helping to safeguard the business if one partner dies. On the death of one of the policy holders, payment is made to the other.
Are life insurance payments tax deductible?
Unfortunately not, as HMRC views insurance payments as a personal cost so they are not related to your business.
Do self-employed people need any other types of insurance?
Depending on your personal circumstances, it can be useful to also consider other types of self employment insurance, alongside a life insurance policy.
Critical Illness Cover
Critical illness cover is an addition to life insurance policies. As self-employed sick pay sadly doesn’t exist, this cover can provide support if you ever have an illness or injury that prevents you working.
Self-employed income protection
Some self-employed people may also choose to take out income protection insurance. This offers a cash payout if you’re unable to work because of illness or injury and can cover the following costs:
rent and bills,
However, it can’t be used to pay for business costs (for example employee salaries), and large debts (as this cover is intended to replace your regular income it cannot be used as a lump sum to pay off large debts such as the remainder of a mortgage). This type of insurance provides a regular monthly payout until you are able to work again, or until you retire or your plan ends, whichever comes first.
How much you will receive in monthly payments would be determined by your insurer by looking at your business’ pre-tax profits. Generally, insurers will pay out a percentage of your monthly income (usually around 60%) rather than the full amount so it’s important to work out your costs and budget. You can also choose to defer payments if you would rather use personal savings before claiming on your insurance. This can be preferable if you’re only unable to work for a short amount of time.
If you’d like to find out more about your life insurance options, as well as critical illness and income protection cover, it’s important to use a website you can trust to compare the best options from different providers. if you’re searching for the best insurance self employed people can use Free Price Compare to help identify the best insurance for your individual circumstances. Use our simple online tool to find the best deal and customise your quote.
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