How does life insurance work for the self-employed?
Employers often offer life insurance or death-in-service benefit as an employee perk. But self-employed workers will need to buy their own cover.
Key takeaways
Life insurance is a type of insurance policy that provides your loved ones with a cash lump sum in the event of your death.
Life insurance for the self-employed is exactly the same as life insurance for anyone else.
Married or cohabiting couples can either take out two single life insurance policies, or one joint policy.
What is life insurance?
Life insurance is a contract where you pay an insurer monthly premiums and, in return, it pays a set sum to your beneficiaries if you die during the policy term. The idea is that your family would not be left struggling financially without your income or other contribution to the household.
Unlike salaried employees who are often offered employer-provided cover, self-employed workers need to arrange, and pay for, their own life insurance.
The people who receive the money from a life insurance policy are known as ‘beneficiaries’ and are usually your spouse or children. They can spend the cash as they like, but it is usually spent on rent or mortgage payments, household bills, and other living expenses such as childcare or education.
Do I need life insurance if I am self-employed?
For people who run a business, life insurance can play a crucial role in ensuring the continuation of operations if you pass away. If your business relies on you as the primary income generator, your death could impact business partners, employees, clients, and investors.
A life insurance payout can help settle business debts, support co-owners, or facilitate ownership transitions.
Another type of business insurance company owners should consider is key man or key person insurance. This is a specialist form of life insurance designed to protect businesses when someone crucial to the ongoing operations of the company – such as the owner or chief executive – dies suddenly.
If you are a sole trader, freelancer, contractor or run a limited company on your own, whether you need life insurance does not so much depend on your employment status, but whether someone else depends on your income.
This will usually be the case if you co-habit, are married, and/or have children or other family members dependent on you financially.
If you are single with no children, you probably won’t need life insurance. However, you might want to consider other types of insurance such as critical illness or income protection.
Is life insurance more expensive if I am self-employed?
When it comes to buying an individual life insurance policy, life insurance does not cost more if you are self-employed.
How much you will pay depends on factors such as:
Age
Pre-existing medical conditions
Lifestyle factors
Whether you smoke or not
Cover level
Policy type and term
The type of work you do
Life insurers often charge higher life insurance premiums to people who do dangerous jobs. For example, people who work in the Armed Forces or work outside at heights. This applies whether you are employed or self-employed.
Many employers offer life insurance or death in service benefit to employees as a workplace benefit. This means it forms part of their renumeration package and they won’t have to pay for it. Most self-employed workers won’t have this option so, in this context, life insurance can work out more expensive if you are self-employed.
What are the different types of life insurance?
There are several different types of life insurance designed to suit various needs and budgets.
When we talk about the “term” in life insurance, this is the period of time you’ll be covered for. For example, 30 years. A lot of people match their life insurance term with their mortgage term – so your family could use the cash to pay off the mortgage if you died. Once the term is finished you won’t be covered, unless you extend your policy or take out a new one.
Here's a quick rundown of the main life insurance types:
Level Term Life Insurance: Often called family life insurance, offers a fixed lump sum payout during the policy term, with premiums typically lower when you're younger.
Decreasing Term Insurance: Ideal for mortgage holders, the payout decreases over time, in line with your mortgage balance.
Increasing Term Insurance: Accounts for inflation, with the payout increasing annually, making it more expensive than level or decreasing term insurance.
Whole of Life Insurance: The most expensive option with an endless term, it guarantees a payout whenever death occurs.
Joint Life Insurance: Covers two partners but only pays out after the first death.
