Life insurance for the self employed

Yes, you can get life insurance if you’re self-employed. Being self-employed shouldn’t mean you miss out on the kind of financial protection offered through life insurance.

Whether you’re freelancing as a graphic designer, running a local café, consulting in IT, or selling handmade products online, life insurance may be worth exploring to help secure your loved ones’ financial future if the unexpected happens. But it’s important to understand the basics first.

The basics of life insurance

Life insurance pays out a lump sum of money if you die during the term of the policy. This means that, should the worst happen, those you care about could use the money to help pay bills or maintain their living standards when you're no longer here.

Although there are different types of life insurance policies, they fall within two main categories: 

• Term life insurance – lasts a set number of years (a ‘term’) and is the most common type of life insurance. You’ll likely have three options to choose from, including decreasing, level and increasing level term cover (more on these below).
• Whole of life insurance – lasts as long as you live (rather than a set period of time) with a lump sum paid out whenever you die. For those aged between 50 and 80, you can find a guaranteed whole of life insurance, like our Over 50s Life Insurance (more on these below).

And with any life insurance policy, it’s important to know we’ll only pay out on a successful claim. It’s not a savings or investment product. If you stop paying premiums when they're due or if you cancel the policy, your cover will end.

What are the benefits of having life insurance when self-employed?

Whether you’re employed by a company or self-employed, imagining how those you care about might cope financially when you die could be an uncomfortable thought. The difference is, if you’re employed, life insurance may be offered as a benefit of employment and may be part of annual benefit reviews. If you’re self-employed, however, you won’t have this benefit unless you seek it out yourself. 

And regardless of your type of employment, the benefits of life insurance are worth exploring.  

One of the most important benefits is that the payout can help ease the financial burden on those you care about most. They can use the money for:

1. Immediate expenses and funeral costs - life insurance can help cover funeral expenses, burial costs, and any bills that come up after a death. This prevents your loved ones from facing financial strain during an already difficult time.
2. Living costs and debt repayment - those who get the payout may use it to maintain day-to-day living standards, pay household bills, and clear outstanding debts such as credit cards, loans and mortgages. This could help keep finances steady and prevent racking up extra charges or late fees.
3. Future financial goals - the payout could go towards big future expenses, like paying for your children’s education or helping them save for retirement. Some families start by putting the payout somewhere safe (like low-risk accounts) then plan for investments later.

A further benefit is that life insurance payouts in the UK are currently free from income tax and capital gains tax. But they may be subject to inheritance tax, if the money is paid into your estate. So your loved ones get the full amount without deductions, you can place the policy in a trust. Tax rules can change and are based on your individual circumstances, so it's important to consider independent financial advice.

What are the limitations?

While life insurance can offer important financial protection, it has its limitations. Like any financial product, it’s worth weighing up the pros and cons when deciding what’s right for you.  

1. Missing payments can cancel your cover - this means that if you stop paying your premiums, your policy could be cancelled and you won’t get any money back. It’s important to keep up with payments to make sure your cover stays active. 
2. It’s not always a guaranteed payout - with term life insurance, if you outlive the policy, there’s no payout at the end. That means you could pay premiums for years and not receive anything back, unless you pass away during the term.
3. It doesn’t build cash value - life insurance is designed for financial protection should you die during the policy term. It isn’t a savings or investment plan and will only pay out on a successful claim. If premiums aren't paid the cover ends.

This depends on the type of life insurance rather than type of employment. And although there are some similarities, there are important differences in the payouts and length of cover between term and whole of life policies.

Term life insurance

With term life insurance, you’ll likely have three options.

1. Level term life cover -  this is also known as ‘family protection’.
   You’ll choose the length and amount of cover and, if you die during this time, your loved ones could use the lump sum to help them pay off debts or put it towards living costs and monthly outgoings, such as rent.
   The price you pay for your premium will depend on different factors, such as the length and amount of cover you choose, your age, your medical history and whether you smoke. And for level term life cover, both the cover amount and premiums you pay each month will stay the same.
2. Decreasing term life cover -  you may come across this as ‘mortgage protection' insurance.
   Similarly to level term cover, you’ll choose the length and amount of cover. But, this policy usually lasts as long as your mortgage or a long-term loan and the payout generally goes down in line with your mortgage as you pay it off.
   How much you have left to pay on your mortgage usually decreases over time, so the payout for this type of life insurance also goes down. That’s why it’s called decreasing cover and why it usually costs less than level cover.
   However, your monthly premiums (the amount you pay) will be the same throughout the life of your policy.
3. Increasing term life cover - like level and decreasing term, increasing term lasts for a set period. But the payout increases during the term to help account for inflation. Inflation is when prices for things keep going up, so the money in your pocket doesn’t stretch as far. When things cost more, but your money hasn’t grown to match, it means you can buy less with the same amount.
   But with this type of life insurance, your payout increases in line with inflation. It also means that your premiums, with increasing term life cover, generally go up as well.

Whole of life insurance

This type of insurance lasts the whole of your life, rather than a set period of time (the term), and there are two types: 

1. Guaranteed whole of life - This is sometimes known as "guaranteed acceptance whole of life cover" or "over 50s/60s life insurance". Typically it's available to those who are in their 50s or 60s. These policies won't ask you any medical questions and will cover you whatever your health. They also pay out a lump sum, but they may not pay out the full cover amount in the first 12-24 months.
   With our Over 50s Life Insurance Plan, you'll have full cover after 1 year. We guarantee to accept you with no health questions if you're a UK resident aged 50 to 80.
   When you apply for our policy, you can choose either the premium you want to pay or the lump sum you'd like us to pay on death. There is a minimum premium of £5 per month. Our premiums are guaranteed and will never go up.
2. Underwritten whole of life - This type of cover is often used for long term inheritance planning because it pays a lump sum when you die, which could be used to cover potential inheritance tax bills. And since these types of policies often cover larger amounts of money, they will need a more detailed application that includes underwriting. Underwriting is a process that reviews your health, lifestyle and finances.
   This type of cover is usually sold through financial advisers, who can help with more complex needs.

What will I need to apply for life insurance when self-employed?

For term policies, you'll likely need to provide some personal details including your name, date of birth, address and contact details. You’ll also need to answer some health and lifestyle questions. So, for example, you may need to give details about your:

• GP
  
• height, weight, smoking status and alcohol consumption
• pre-existing medical condition and family medical history
• any recent overseas travel (to find out if you’ve travelled to countries where there may be a health risk).

You may also want to have your cover choices to hand, like the type of cover (level, decreasing, increasing, whole of life, or guaranteed whole of life) and the amount of cover.

Typically, there's no medical underwriting for guaranteed whole of life insurance, so it's unlikely you'll be asked health and lifestyle questions. For example, you won't need to answer these type of questions with our Over 50s Life Insurance Plan.

If you’re self-employed in the UK, life insurance normally isn’t tax deductible. That’s because HMRC sees personal life insurance, like the kind you take out to protect your family, as a private expense, not a business one.^{Footnote [1]}

Even if you pay for it from your business account, you can’t normally claim it as a business cost when working out your taxable profits. This is outlined in HMRC’s Business Income Manual, which says that premiums paid by a sole trader (or partner) for life, accident, or sickness cover for themselves or a partner are not allowable deductions when figuring out the number for their trading profits. ^{Footnote [1]}

It's also worth remembering that tax treatment depends on individual circumstances and may change in the future. So, you may want to find advice from a financial adviser, tax adviser or accountant.

The responsibilities that come with being self-employed may sometimes feel overwhelming with their own types of worries. These could be from:

• working different and potentially long hours
• sometimes not having a steady or predictable income
• managing or overseeing all different parts of your business.

Over time, your health and wellbeing may be impacted from stress and other risk factors from your work. For example, manual labour could lead to injury from the repetitive lifting of heavy goods. And although these risks apply to manual workers no matter how they’re employed, if you’re self-employed you may need to manage the consequences on your own. Unlike salaried employees, if you’re self employed, you might not have access to workplace benefits like sick pay, income protection, or death-in-service cover.

This means that if something goes wrong, like an accident or serious illness, you might not have the same financial safety net to fall back on if you’re self-employed. That’s why having personal protection, like life insurance, can be especially important. But there are other types of insurance that can help, too.

Health insurance

Having private health insurance can give you fast access to treatment, which may help you get back to work sooner, especially if you're self-employed and time off means lost income. Waiting times for non-urgent procedures can vary. Private health cover can offer quicker appointments, more flexibility in choosing specialists, and access to a wider range of treatments.

With our health insurance, you'll have access to extra wellbeing support. For example, you could get access to wellbeing services such as app-based digital GP appointments, apps designed to support healthier living, services that support mental health and discounts on products that can help with healthy lifestyle choices. These features are designed to help you stay healthy, spot issues early, and feel more in control of your health, so you can keep doing what you love, with confidence. But please note that some of these services are non-contractual and can be changed or withdrawn at any time.

Income protection

With income protection, if illness or injury keeps you from working for a while, you can focus on recovery instead of worrying about how you'll pay your bills. You get a percentage of your lost earnings, which can help you cover your monthly expenses.

Critical illness

Suffering a life-changing setback, like a heart attack or stroke, can affect the whole family. With critical illness cover, a lump sum of cash can be paid out tax-free to help manage the medical situation and maintain your family's lifestyle.

 

Health insurance, income protection and critical illness cover aren't savings or investment plans and they'll only pay out on a successful claim.