Guides

Life insurance for self-employed workers

8 minutes

You can offer your family financial security when you take out a life insurance policy.

As a self-employed worker, you’ll be familiar with how varied your bank account can look on any given day. Depending on the types of jobs available and how much work is required, you could have exceptional months and quieter spells. Despite this, your family rely on your income to pay the bills, childcare costs and household expenses. So, if you were suddenly to pass away, they could really struggle.

That’s where life insurance is ideal. If your family is dependent on your income, and  you pass away whilst your policy is active,  they could continue to be supported financially thanks to a lump sum payout. For self-employed workers, this offers immediate reassurance, even if life insurance is a just-in-case backup plan.

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

Do you need life insurance if you’re self-employed?

If you’re self-employed, life insurance could be a great option for you. As well as offering your loved one’s financial security in the event of your death, it reassures you that your dependants will be looked after.

As you’re self-employed, you’ll also appreciate that your salary can be dependent on the amount of work you have and the types of services you charge for. With a family or loved ones who rely on you, the occasional loss or increase in income is often something you need to budget for. However if that income were to be lost permanently, if for example you were suddenly to pass away, life insurance can be incredibly helpful, especially if you are considered the breadwinner for the family.

If you were to pass away during the term of the policy, your family would be able to claim your life insurance policy, helping them to pay off any mortgage, keep up with rent payments, perhaps put some money away for your children’s future, or aid with your funeral expenses.

Do you need life insurance if you have general insurance?

Life insurance and general insurance (sometimes called personal insurance) are different things. General insurance covers the likes of your house, car and travel insurance, and doesn’t offer the same benefits or comforts that life insurance does. Whilst it’s a legal requirement to have car insurance, home, travel and life insurance are optional

It’s worth noting that general insurance is designed to cover things like your car, and home contents, and is not designed to cover you in the event of your death. Instead, if you suddenly pass away, a life insurance policy can help those that rely on you financially . You can opt for a set amount of cover and policy length, ensuring you’re covered whenever you need to be.

How does life insurance work if you’re self-employed?

Despite being self-employed, life insurance isn’t out of reach for you, and its works no differently whether you’re employed or self-employed. You can specify the total amount of cover you want, as well as the length of time you want to be covered.

When you first purchase life insurance, you’ll want to consider why you want a policy. Many people choose it for peace of mind, allowing them the reassurance that their loved ones will be looked after financially if they pass away. Others choose it to help pay off remaining mortgage balances If you’re self-employed, you might just want your loved ones to receive some financial security

As most life insurance policies are offered for a set amount of time, you can normally choose for it to last between five and 50 years, although this depends on the provider you select. For term policies, you can choose either level or decreasing cover and your loved ones will receive your death benefit if you pass away before your policy expires. In some cases, you may want to consider a whole-of-life assurance policy instead, which pays out whenever you pass away.

Outliving your policy is good and many are fortunate enough to do so. This means that you’ve been covered for the amount of time and total death benefit you wanted. If you still want cover, you’re free to purchase a new policy if your dependants still need the reassurance and support, or you can carry on without one. The choice is yours.

What types of life insurance are available for the self-employed?

There are many types of life insurance you can benefit from if you’re self-employed, each offering protection to meet your needs.

As someone self-employed, you could be the breadwinner for your family, and they could heavily rely on your income. Even if you live in a dual-income household, your monthly salary would be missed if you suddenly passed away. So, if this is something you want to protect against, life insurance might be a good choice for you.

Level cover

With level cover, you’ll choose the amount of death benefit you want. This could consist of your average earnings over a year, the amount you have in debt or mortgage to pay, or everyday household costs. If you pass away whilst your policy is still active, your dependants can claim the money from your death benefit, to help. alleviate any financial pressures they might face.

Advantages and disadvantages of level cover for self-employed workers

Advantages

Disadvantages

  • Provides  a  lump sum to help replace some or all of  your income, if you pass away during the period of cover, helping any family with household expenses and any childcare costs.
  • Can be used to cover additional things as well as providing a lump sum to help repay a mortgage loan in the event your pass away during the policy term.
  • Tends to be more expensive than decreasing cover.
  • Your cover won’t adjust with inflation. So, it might not pay out with future living costs at the time of  any claim, in mind.

 

Decreasing cover

Decreasing cover is ideal when taking out a capital and interest repayment mortgage. Being self-employed, because of the often fluctuating nature of your income, you might find you’re already up against challenges if you’re purchasing a house, and trying to obtain a mortgage.  So, it might aid you to take out decreasing cover for an added layer of reassurance for your lender–  and whilst this isn’t a legal requirement, many lenders will often ask for life insurance cover to be in place.

When you purchase a house, say with a 25-year mortgage and you’ve borrowed £200,000, you can take out an insurance policy worth the exact amount that you’ve borrowed on your mortgage and for the same length as your mortgage agreement. The idea is that, as long as you repay a consistent amount towards your mortgage each month, the amount of cover on your life insurance policy will decrease in a similar way to the remaining balance you owe. If you pass away before your policy ends, the payout from the insurance policy can be used to repay all or some of your remaining mortgage. Otherwise, your policy should end at the same time as your mortgage.

Advantages and disadvantages of decreasing cover for self-employed workers

Advantages

Disadvantages

  • You can get a policy to last the length of your mortgage, offering reassurance to your loved ones that, if you pass away, your outstanding mortgage amount could be paid off in part or full.
  • Because the cover amount decreases over the policy term, it’s usually cheaper than other types of life insurance cover.
  • Although you’ll request cover in line with your remaining mortgage balance, if you underpay your mortgage repayments at any point, your dependants might not get the full amount they need.
  • Because it’s specifically designed to cover a capital and interest repayment mortgage, if you want cover in excess of your mortgage you’ll need to consider a different type of policy.

  

Increasing cover

Just like decreasing and level cover insurance policies, you’ll suggest a total amount to be covered for. You also tell your insurer how long you want your policy to last. However, instead of decreasing or offering the exact amount you chose, the amount of cover will either increase by a fixed amount, or the increases in the amount of cover will be linked to inflation. The amount you pay for your policy will usually also increase as your cover increases.

Advantages and disadvantages of increasing cover for self-employed workers

Advantages

Disadvantages

  • If your policy increases in line with inflation, the amount of the pay-out aims to keep up with rising prices over your policy term.
  • If you have a policy lasting over a longer period, it aims  to provide your loved ones an amount that is more in line with the current cost of living at the  time of claim.
  • If your cover is linked to inflation, because it’s not known how much inflation might increase in the future, you may find you’re unable to afford the premiums in the future.
  • Your monthly premiums might cost you more than other term life insurance policies.

 

Whole of life cover

Unlike the above three options, whole of life cover has no set end date. Instead, it’s guaranteed to pay out whenever you pass away. For self-employed workers, especially those who continue to work well after retirement to support their families, whole of life cover always ensures your loved ones will receive a payout. If you started a family much later in life or are still working to financially support vulnerable adults in your life, , it ensures that, after you’re gone, they’ll continue to be supported.

Advantages and disadvantages of whole of life cover for self-employed workers

Advantages

Disadvantages

  • You’re guaranteed to be paid, whether you pass away at 66 or 102. If you’re likely to have financial obligations or dependants for the rest of your adult life, this could make whole of life a good option.
  • Whatever you choose as your death benefit, your loved ones will receive this whenever you pass away.
  • Premiums for this type of cover are likely to be much higher than a policy over a fixed term, which could be an expense for self-employed workers, especially for those on an unpredictable monthly income.
  • If you stop paying your monthly premiums at any time, you could lose your cover and your loved ones won’t be able to claim.

 

It’s important to note that LV= doesn’t offer increasing or whole of life cover directly through https://LV.com . You’ll need to speak to a financial adviser if you want to explore these options further. We’ve partnered with LifeSearch who offer independent professional advice based on your individual needs.

What is the best life insurance policy for someone who is self-employed?

In truth, there’s no particular life insurance policy that’s best suited to self-employed workers. One thing that is worth noting though is the expense of monthly premiums. As self-employed workers often have different take-home pays across the year, some months may prove more challenging when work has been slow, and invoices you’ve sent out haven’t been paid on time.

However, life insurance can offer self-employed workers a level of comfort and security, especially if they’re the main breadwinners in the family. If you’re purchasing a home, you might choose decreasing life insurance as a safety net. Whereas, if you just want peace of mind that your family will have some financial support for day to day living expenses when you’re gone, you’ll opt for a level or  increasing policy. The choice is yours.

Can you add on critical illness insurance for self-employed workers?

Of course! In fact, it could be a sensible choice if you’re self-employed too. Any time away from work will cost you, and that’s where critical illness cover can help. Critical illness insurance offers a payout if you are diagnosed with a life-changing or life-limiting medical condition. As you deal with certain critical conditions, you could be entitled to a lump sum payout. whilst you recover, and re-adjust.

Each insurer will provide its own list of conditions covered for adults and children. These can range from certain cancers to third-degree burns. Before you purchase, it’s worth reviewing the list of illnesses or medical conditions that providers offer.

Self-employed and looking for life insurance?

At LV=, we offer life insurance products for self-employed workers, providing you with a sense of security for your family’s future. If you’re interested, get a quote today.