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Life Insurance for the Self-Employed

For many people, being self-employed is the dream. Being their own boss and choosing their hours is a fantastic way of life. But with no employer, comes the lack of certain benefits. No sick pay and no death in service pay out can mean that if something were to happen to you, your loved ones would suffer financially.

Life insurance is an agreement whereby you pay a monthly cost to an insurer, and if you pass away during the policy, a pay-out will be made to people of your choosing.

While it may be unpleasant to think about, it’s important to make sure that your dependents wouldn’t be left with any financial burden that could at the least, cause them stress and at the most, put them in debt.

There is a wealth of information in different places online and it can get confusing and time-consuming, which is why we have created a guide of everything you need to know about Life insurance for the self-employed.

Why is it Important if you’re Self-Employed?

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Having life insurance makes sense for anyone with financial dependents, such as a partner or children. Without it, your family would have to replace your lost income, meet mortgage and other debt payments, pay for childcare, and cover the cost of your funeral. This could cause a world of problems for people already suffering your loss, and it would be much kinder to pay for insurance that would protect your dependents from any financial burdens.

Probate can take months, or even years to be completed, and so cannot be solely relied upon.

Of course, your estate might cover some of these costs, but the value of your estate must go through probate – this is the legal process of dealing with the money of the deceased. Probate can take months, or even years to be completed, and so cannot be solely relied upon.

How does the Pay-out Work?

Life insurance pay-out is not automatic, a claim must be made after the policyholder has passed. Once the claim has been made, it can take up to 60 days, sometimes more, before the money is given to the beneficiary.

Before signing a policy agreement make sure you are aware of who exactly the insurance pays out to and how long it takes the company to pay.

The Difference between Life Insurance & Income Protection

We compare plans from the leading life insurance providers

The two cover different things and pay differently. If you become unable to work due to sickness or injury, Income Protection will provide a regular payment so that your dependents don’t suffer from financial hardship while you aren’t working. This is similar to sick pay that would be given by a company if you weren’t self-employed. You will pay monthly premiums for Income Protection and once you show proof that you cannot work, you will start to receive the payments.

Life Insurance provides a lump-sum pay-out to your family if you pass away. In the event of your death, your dependents would not only have to deal with the loss of your income, but they would also have the burden of paying for funeral costs. The average cost of a funeral in the UK is £4k.

The Life Insurance pay-out would also help with financial commitments such as paying off a mortgage and general family expenses, as well as potentially contributing towards an inheritance for your family.

Both policies have their advantages, and as a self-employed individual, it would be helpful to have both forms of cover so that your family could be fully protected.

Different Types of Life Insurance

There are many types of insurance you can consider if you’re self-employed, but here are some of the most common policies.

Term Based Insurance – this is seen as the most basic type of cover, and it provides insurance for a set period that you and the insurer agree upon. If you pass away within this period, your dependents will receive a pay-out, but if you pass after the agreement, there will be no pay-out. There are two types of term-based insurance – level term and decreasing term:

  1. Level Term Life Insurance – this provides a fixed amount of cover which maintains its value throughout the length of the policy. This is ideal for covering fixed costs such as an interest-only mortgage, funeral, or inheritance.
  2. Decreasing Term Life Insurance – this cover is best for covering costs which reduce over time, such as a repayment mortgage, because it provides a lump sum pay out which reduces over time. This type of cover is usually much cheaper than level term.

Index-Linked Life Insurance – since the cost of living increases each year, money changes in value. This type of cover rises in value to match the Retail Prices Index – the official measurement of UK cost of living.

Unit-Linked Life Insurance – this plan uses a portion of your monthly payments as investments (of your choice) and the rest us used to pay for your life insurance.

Life Insurance Quotes for the Self-Employed

Each policy will be unique, but here are some quotes for Life Insurance from

For a level term cover of £100,000 that would be spread over the course of 20 years, for a young adult in their 20s (who is a non-smoker):

  1. Beagle Street – £3.26 per month
  2. Virgin Money life insurance – £3.49 per month
  3. Legal & General life insurance – £4.17 per month

For a level term cover of £100,000 that would be spread over the course of 20 years for an adult in their 50s (who is a smoker):

  1. LV life insurance – £29.27 per month
  2. Legal & General life insurance – £30.87 per month
  3. Aviva life insurance – £32.38 per month

Writing your Life Insurance in Trust

You should consider writing your life insurance in trust. Not only can this bypass the lengthy probate process, but it can also reduce or sometimes even avoid the 40% inheritance tax, and finally it allows you to specify how you would like the money to be distributed when you pass.

How Much will my Self-Employed Life Insurance be?

The cost is calculated based on the likelihood of you making a claim. Factors that will be considered are:

  • Age
  • Health
  • Smoking Status
  • Profession
  • Type of cover
  • Amount of cover

After these factors are assessed, you will be given a quote. The higher the risk of a claim, the more expensive your premiums are likely to be.

Is Life Insurance Tax Deductible if you’re Self-Employed?

Not in every case, but sometimes the insurance can be tax-deductible if you’re self-employed. Some professionals get life insurance through their business, allowing them to claim it as a business expense. Doing it this way, instead of claiming through your personal income can save you money in the long run.

Things to Watch Out for

Insurance companies can be cautious about giving cover to people with health problems, e.g., obesity, diabetes, heart disease, depression, or any other chronic condition. Serious issues can lead to higher premiums or sometimes a rejection. However, there are life insurance companies that specialise in helping customers with health problems.

Also, make sure you check your policy for any unfavourable terms, the best option is to ask an insurance advisor to read through it for you, as they will immediately spot any red flags. If they do, they will be able to advise on safer alternatives.

Final Thoughts

You should now have a clear idea of how life insurance works for the self-employed, so that you can speak to an adviser and obtain the right policy for you. You can put your and your family’s minds at ease that if anything were to happen to you, they would continue to be well looked after.