A Guide to Life Insurance for Self-Employed Workers

The coronavirus pandemic rocked all of our worlds in some way and I’ve been reminded that everything can change in a heartbeat.

As we see the deadly virus slow and the world return to ‘normal’, I’ve begun to wonder what my life could have look life right now if something had happened to me or my husband? How would I cope financially without the main breadwinner in our household by my side, helping to keep a roof over my head?

None of us like to think about the worst, and I’ll admit that my recent thoughts made me really uncomfortable. But knowing I have the right income protection in place meant I could put those uneasy thoughts aside and move forward with the peace of mind that we are financially protected if anything happens to myself or my husband.

That peace of mind is self-employed life insurance – a lump sum of money paid out in the event myself or my husband become sick and cannot work in our businesses or, worse, one of us passes away. It’s money that will let either of us keep paying our mortgage, car payments, utilities and food to give us time to recover and rebuild our lives.

I had a socially distanced sit down with award-winning life insurance broker, Reassured, to find out more about life insurance, the products that are available and why it’s so crucial to secure when you’re self-employed.

What is Life Insurance?

Life insurance provides financial protection for your loves ones if the worst were to happen and you were to pass away. It’s a cost-effective option that provides financial security with monthly premiums start from 20p-a-day and the young and healthier you are, the cheaper the cover.

Those who are employed will normally benefit from sick pay and possibly death in service from their employer.

Death in service means their employer provides a lump sum payment to their family, if they were to pass away during their service at work. The lump sum amount is often a multiple of their annual salary but will vary depending on the employer.

Being self-employed means you won’t benefit from these work perks, so arranging appropriate life cover is imperative.

Why is Life Insurance So Important For the Self-Employed?

As someone who is self-employed you won’t have an employer to pay you sick pay or arrange a death in service policy on your behalf.

That means if you fall seriously ill and cannot work in your business or pass away, there’s no financial safety net for you and your loved ones to:

  • Pay off the remaining mortgage balance
  • Cover rising funeral costs – £4,417 (source: SunLife)
  • Pay off large debts
  • Cover day to day living costs
  • Meet college and/or university expenses
  • Cover full-time childcare costs – £242 a week (source: Money Advice Service)

Taking out a life insurance policy can protect all of these things and more, ensuring that your loved ones won’t fall into financial difficulty if your income disappears.  

Usually for an additional cost critical illness can be added to any term life insurance policy. This allows you to make an early claim and receive a pay-out to cover lost business income if you’re diagnosed with a life changing illness, diagnosed with a life-threatening illness and left unable to work.

Terminal illness cover comes at no extra charge with all term policies arranged through Reassured.

How Does Self-Employed Life Insurance Work?

Life insurance works like this:

First you choose a sum assured (“pay out amount”) and how long you would like to be covered for (“the term”), then you pay a monthly premium to keep this cover in place.

Usually the sum assured will be set to cover significant costs such as a mortgage debt and future family living costs to avoid loved ones falling into financial difficulty if your business income disappears.

The term is often set to coincide with major life events, for example when your children become financially independent or your mortgage is cleared.

The type of cover, the term and events the policy is matched to depends on the type of policy you take out as well as the amount you are willing to pay each month.

What Are the Different Types of Life Insurance?

There are 4 main types of self-employed life insurance policy that you can choose from:

  1. Decreasing term life insurance (or mortgage life insurance)
  2. Level term life insurance
  3. Whole of life insurance
  4. Over 50s plan

Each of these policies protect different areas of your life and your eligibility depends on your health, age and status.

Decreasing term life insurance

Also known as mortgage life insurance, this type of policy is often used to protect a repayment mortgage meaning any outstanding debt is settled in the event of your passing, keeping roof over your loved ones heads if you are no longer there to pay the mortgage.

Your sum assured will reduce over time, meaning your monthly life insurance payments will reduce too over the term of the policy.

Level term life insurance

This cover provides a lump sum payment to your loved ones if the worst was to happen to you, during an agreed term length.

This policy is well suited to paying off large debts because a lump sum is paid with your sum assured remains fixed throughout the term, so you’ll receive a greater pay out than with decreasing term life insurance.

Whole of life insurance

With whole of life insurance is a policy lasts for the rest of your life, paying out a lump sum to your loved ones in the event you pass away.

Many use their payout to provide an inheritance for their loved ones to enjoy upon their passing. But the proceeds from a life insurance policy of this nature can form part of your estate and therefore could be subject to 40% inheritance tax. However, you can avoid both IHT and probate by writing your policy in trust.

For any term or whole of life policy, you’ll need to provide medical information during the application process so insurers can work out the level of risk you pose.

An Over 50s Plan

An over 50s plan is a policy that lasts for the lifetime of anyone who is between 50 and 85. You won’t have to answer any medical questions and anyone aged 50 – 85 is guaranteed acceptance.

Your sum assured will typically be capped at £20,000, so a pay out from an over 50s plan is often used to cover funeral expenses.

Depending on your budget, you may also want to look into income protection and health insurance to add extra layers of financial protection. These will provide cover if you were to fall ill and were no longer able to work.

How To Get Life Insurance

A life insurance policy can be taken out directly from any insurer, through a comparison site or through an FCA regulated life insurance broker.

It’s always wise to compare quotes from multiple providers as costs can vary wildly. This will ensure you’re getting the best price for your policy, so going direct isn’t always the best option.

While comparison sites allow you to compare policies, you won’t be able to ask questions and they sometimes charge a fee.

By using a life insurance broker who specialise in the self-employed, like Reassured, they can take you through the whole application process, understand how your income works, answer any questions and compare quotes on your behalf to find you the best deal. What’s more, they do not usually charge a fee for their service because as they earn their commission directly from the insurer.

However, you decide to compare your quotes the important thing is that you have comprehensive protection in place especially during these very uncertain times with the right level of cover for you.

What Level of Life Insurance Cover Do You Need?

The amount of cover you need will vary depending on your personal circumstances and the type of protection you are looking for.  There is no one size fits all.

Before you start getting quotes for life insurance, it’ll help if you have an idea of the level of you are looking for. The typical items people look to take out cover for are:

  • Mortgages
  • Loans
  • Childcare and education expenses
  • Income replacement
  • Critical Illness

Try the Reassured online calculator to help give you an idea of the level of cover that’s right for you.

Tax for Self-Employed Life Insurance

When you work for yourself even though you need to arrange your own life insurance and critical illness cover, your insurance payments are not a tax allowable expense on your tax return.

Self-Employed Life Insurance is a complicated subject and I am not a financial advisor. If possible, you should speak with an expert to help you assess your situation and make a professional recommendation for you.

Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.