Self-Employed Life Insurance: Why It's Even More Important
Employees whose company offers death in service insurance have a built-in financial safety net, typically two to four times their salary, that their family receives if they die while employed. If you are self-employed, that net does not exist. Your family has only what you have personally arranged.
This makes personal life insurance not just useful but essential for self-employed people with dependants or financial commitments. The good news is that being self-employed does not affect your ability to take out life insurance, the same policies and underwriting criteria apply as for employed individuals.
What Type of Life Insurance Suits Self-Employed People?
The right type depends on what you are trying to protect. For most self-employed people with a mortgage and family, the same core options apply:
- Level term: fixed payout for a fixed term, suitable for protecting an income replacement fund or interest-only mortgage
- Decreasing term: reducing payout aligned to a repayment mortgage balance
- Family income benefit: monthly income payout, particularly useful if you want to replace the regular income you would have generated
Relevant Life Insurance for Limited Company Directors
If you operate through a limited company, relevant life insurance is worth considering alongside, or instead of, personal life insurance. A relevant life policy is a death-in-service arrangement paid for by your limited company. Key benefits:
- Premiums are paid by the company and are treated as an allowable business expense
- The benefit is paid out to a trust for your family and is free of income tax, capital gains tax, and typically inheritance tax
- It does not count toward your lifetime pension allowance
For higher-earning company directors, relevant life insurance can be significantly more tax-efficient than a personal life insurance policy paid from post-tax personal income. Our advisers will explain the difference and model the tax saving for your specific situation.
Key Man Insurance
If your business would suffer significant financial harm if you were to die, for example, if you are the sole revenue generator, hold key client relationships, or have specialist skills the business cannot quickly replace, key man insurance provides a cash sum to the business to help it survive your loss. This is separate from personal life insurance, which protects your family. Many self-employed business owners need both.
Income Protection for the Self-Employed
Life insurance protects your family when you die. Income protection protects your income while you are alive but unable to work. For self-employed people, who have no employer sick pay or SSP safety net, income protection may actually be the more pressing purchase. The two products address different risks and ideally both should be in place.
Frequently Asked Questions
Do I need to provide accounts or tax returns to get life insurance?
No, life insurance underwriting focuses on your health and lifestyle, not your income level. Income verification is only relevant for income-based products like income protection. For a straightforward life insurance application, you simply answer health and lifestyle questions; your trading status as self-employed does not complicate the process.
Can I write my self-employed life insurance in trust?
Yes, and this is strongly recommended regardless of employment status. Writing a policy in trust means the payout goes directly to your beneficiaries without passing through your estate, avoiding potential inheritance tax and delays in probate. TopQuote can facilitate trust arrangements as part of setting up your policy.
Tanweer Hussain is the editor at TopQuote, an independent life insurance broker and appointed representative of The Openwork Partnership with over 20 years of experience. He oversees the accuracy of all published content, including the factual and regulatory detail that matters most on claims-related topics. All content on this page has been reviewed for FCA compliance.