Being self-employed offers freedom and flexibility, but it also comes with financial responsibilities. Unlike salaried employees, self-employed individuals don’t have employer-provided benefits, making life insurance an essential financial safeguard. This guide covers why life insurance is crucial for self-employed individuals, the different types available, and how to choose the right cover for your needs.
Why Life Insurance is Essential for the Self-Employed
Self-employed individuals often rely on their business income to support their families, pay mortgages, and cover daily expenses. Without an employer’s financial safety net, life insurance ensures that dependents are protected if the worst happens.
Key Reasons to Get Life Insurance as a Self-Employed Person
Income Replacement: Ensures your family has financial security if you pass away.
Debt Coverage: Pays off business loans, mortgages, or personal debts.
Business Continuity: Protects partners, employees, or co-owners from financial loss.
Tax-Free Payouts: Beneficiaries receive a lump sum without paying inheritance tax (in most cases).
Types of Life Insurance for Self-Employed Individuals
There are several life insurance options, each suited to different financial needs:
1. Level Term Life Insurance
Pays a fixed lump sum if you pass away during the policy term.
Ideal for those with long-term financial commitments like mortgages.
2. Decreasing Term Life Insurance
The payout reduces over time, often aligned with a decreasing mortgage balance.
More affordable than level term insurance.
3. Whole of Life Insurance
Provides lifelong cover and guarantees a payout whenever you pass away.
Higher premiums but ensures long-term financial security.
4. Critical Illness Cover
Pays a lump sum if you’re diagnosed with a serious illness like cancer or heart disease.
Helps cover lost income and medical expenses.
5. Business Protection Insurance
Useful if you own a business with employees or co-directors.
Includes Key Person Insurance and Relevant Life Cover.
How Much Life Insurance Do You Need?
The right amount of cover depends on your financial obligations and lifestyle. Consider the following:
1. Your Family’s Financial Needs
Ongoing expenses (rent, utilities, childcare, etc.).
Future costs like university fees.
2. Outstanding Debts
Mortgage and business loans.
Personal credit and other financial liabilities.
3. Business Commitments
If your business relies on you, ensure there’s enough cover for business partners or employees.
A good rule of thumb is to have a policy that covers 10–15 times your annual income.
How Much Does Life Insurance Cost for the Self-Employed?
Life insurance costs depend on:
Age – Younger individuals typically pay lower premiums.
Health – Pre-existing conditions may increase costs.
Lifestyle – Smokers and high-risk occupations may face higher premiums.
Policy Type & Cover Amount – Whole of life policies cost more than term policies.
On average, a healthy non-smoker in their 30s could expect to pay £10–£30 per month for a basic term policy, while whole of life insurance could be significantly more.
Can Self-Employed Life Insurance Be Claimed as a Business Expense?
Personal Life Insurance: Premiums are not tax-deductible.
Relevant Life Insurance: A tax-efficient option for limited company owners, as premiums are tax-deductible.
If you operate as a sole trader, life insurance is treated as a personal expense rather than a business cost.
Common Questions About Self-Employed Life Insurance
1. Do I Need Life Insurance if I’m Single and Self-Employed?
If no one depends on your income, life insurance may not be essential. However, you might consider critical illness cover to protect against lost earnings due to illness.
2. Can I Get Life Insurance with Pre-Existing Conditions?
Yes, but premiums may be higher. Some insurers specialise in covering individuals with medical conditions.
3. What Happens if I Miss a Payment?
Most insurers offer a grace period, but missing multiple payments may lead to policy cancellation. Always check your policy terms.
4. Can I Adjust My Cover Later?
Yes, many insurers allow policy adjustments if your financial situation changes, such as getting married, buying a house, or having children.
Final Thoughts
Self-employed life insurance is a crucial safety net for business owners, freelancers, and contractors. Without employer benefits, securing the right policy ensures financial protection for your loved ones and your business. By assessing your needs and comparing policies, you can find the right level of cover at an affordable price.
If you're unsure which policy suits you best, consider speaking to an independent financial adviser to explore your options.
Subscribe for more tips! Subscribe to our newsletter
Disclaimer: Smart With Money may receive compensation from affiliate links, advertisements, and partners featured on this site. This compensation does not influence our editorial content, reviews, or recommendations. Our opinions are our own, and we aim to provide accurate and objective financial information to help you make informed decisions.
Additionally, all content provided on SmartWithMoney.co.uk is for informational purposes only and does not constitute financial advice. Please seek independent financial advice before making any financial decisions.