Self-employed life insurance

Kim Jones
Kim Jones
Updated 6 October 2022  | 3 mins read

If you have loved ones who rely on your income, taking out a life insurance policy can help minimise the financial impact that your death would have on them.

Providing your family with this type of protection and financial support may be especially important if you’re self-employed and don’t have the backup of a company pension or death in service benefit.

Key points

  • If you work for yourself and have a family that relies on your income, then life insurance can be an invaluable form of cover
  • It pays out a lump sum to your dependants should you die while covered by the policy
  • Your loved ones can use the money for everyday living expenses or to pay off the mortgage
  • You may also want to consider family income benefit which pays out fixed regular payments (rather than a lump sum) if the policyholder dies

Do I need life insurance if I’m self-employed?

Being self-employed can mean that you get the freedom to choose the hours you work and the variety of jobs you take on.

But it also presents its own challenges and means you lose out on employee perks that people on a payroll often take for granted. Things like paid holiday leave, sick pay, maternity pay and a redundancy package.

Some employees also have a death in service benefit which pays out to their nearest and dearest should they pass away while they’re still on the payroll. Or they may have a generous workplace pension package that their loved ones could cash in, all of which would help them cope financially.

Without these types of employee benefits, if you pass away, loved ones who rely on you financially might be left struggling to pay everyday bills, unless you make some other kind of provision for them.

That’s where a life insurance package can step in. It will provide some financial stability for the family left behind and peace of mind for the policyholder.

How does life insurance work?

Life insurance is a type of cover designed to provide your family with financial support when you’re no longer around.

There are two main types:

  • Term life insurance - The policy runs for a specified amount of time of your choosing and pays out if you die during that period. You might decide to choose a plan that runs until your children are likely to leave home, when you plan to retire, or for the length of your mortgage
  • Whole of life insurance - The policy remains in place until you pass away, guaranteeing a payout. This is the more expensive of the two options

You’ll pay a monthly premium for the duration of your policy for both options and you decide how much money you’d like your family to receive when you pass away - the higher the amount, the more expensive the premiums.

Types of life insurance for the self-employed

There’s no specific life insurance for self-employed people.

Policies cover people who are employed or self-employed just the same.

You simply choose the type of cover that best suits your circumstances from:

Term life cover

This type of policy runs for a specified number of years and pays out if you die during the term.

You can choose between level cover, increasing cover or decreasing cover.

With level cover, the payout remains the same no matter when you pass away during the term of the policy.

The payout will grow the further you are into the policy term with increasing cover to help combat inflation.

With decreasing cover, the payout decreases over the term of the policy. It’s sometimes called mortgage life insurance because it’s designed to cover a debt that reduces with time, like a repayment mortgage.

Premiums for this type of cover tend to be less expensive than for level term or increasing term cover.

Whole of life cover

This type of insurance provides a guaranteed payout when you die, as long as your premiums are up to date and the claim is valid.

As a self-employed person, you might want to consider other types of life insurance including:

Critical illness cover

You can take out critical illness cover alongside a life insurance policy or on its own. It pays out a lump sum if you’re diagnosed with a serious illness (that’s covered in the terms and conditions) during the term of your policy. The money can be used to pay for lost income if you can’t work because of your illness.

Family income benefit

This pays your dependants a regular, tax-free monthly income to replace your own should you die during the term of the policy. It offers a decreasing level of cover. So, for example, if you take out a 20-year policy and you die 10 years into the term, the income will only be paid for the remaining 10 years of the policy.

Over 50s life cover

There are no medical checks with an over 50s life policy and you’re guaranteed to be accepted if you’re between 50 and 80 years of age. It can be a good option if you’ve had poor health. Full cover usually kicks in after 12 -24 months from the policy start date. Generally, people buy this type of policy to cover funeral costs or to leave money to family as a gift.

Is life insurance tax deductible for the self-employed?

Certain expenses incurred while running a business or when you’re self-employed are tax deductible. That includes things like stationery, travel costs and telephone bills.

Life insurance is designed to pay out to your loved ones and is regarded as a personal expense, not a business one, so it’s not tax deductible.

The payouts from a life insurance policy made to your loved ones aren’t subject to income tax though.

However, some business life insurance policies can be tax deductible. For example, a ‘key person’ policy is life insurance taken out by a business to protect it from the loss of a person crucial to it - such as the owner or director, or a person who has specialist skills particularly needed by the business. The policy pays out to the company in the event of the person’s death.

What else should I consider?

As you’re not entitled to sick pay as a self-employed person you might want to consider income protection insurance. This pays you an income should you become unable to work due to an accident or illness.

Policies typically cover you for between 50-70% of your average income every month.