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Life insurance is like a financial safety net that makes sure your loved ones are provided with money if something ever happens to you. 

It’s one of the best ways to provide financial security for your family, and it's an especially important consideration for self-employed people - like sole traders and freelancers - who don't have benefits like life insurance from an employer. 

However, amidst the hustle and bustle of running your own business, planning for the unforeseeable can sometimes take a backseat. 

In today’s article, we'll look at why life insurance matters, and some simple options that can help you protect your family as a self-employed person in the UK.

Why Life Insurance Matters

Life insurance provides a lump sum payment to beneficiaries in the event of the policyholder's death. 

While it's a topic that many prefer to avoid, especially when they’re in the prime of their career, it's essential for protecting your loved ones and ensuring financial stability in the face of unexpected circumstances.

For self-employed people, the need for life insurance may be even more pronounced. As we touched on earlier, when you’re self-employed, you lack the safety net of employer-provided benefits that PAYE employees have, such as life insurance coverage. 

On top of that, your income may fluctuate, making it crucial to have a plan in place to safeguard your family's financial future, even if your business experiences a downturn.

That said, your need for life insurance will depend a lot on your age and circumstance. If you’re a healthy young person with no mortgage or other major debts, and no children or dependents, then you might choose to pass on life insurance. You’ll have to pay for life insurance out of your own income as HMRC sees it as a personal cost, rather than a tax-deductible business expense

However, if you work to support a family and you know they’d struggle if something happened to you, it’s best to find a life insurance plan that works for you. 

The Life Insurance Options Available to Sole Traders

Fortunately, there are several life insurance options available specifically designed to meet the needs of self-employed individuals. 

Here are some of the best options:

1. Term Life Insurance

Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. It's often more affordable than permanent life insurance policies because it offers coverage for a predetermined term without any cash value accumulation. 

For sole traders, term life insurance can be an attractive option as it provides a straightforward and cost-effective way to protect their family's financial future during the years when they are most vulnerable.

2. Whole Life Insurance

Whole life insurance offers coverage for the entire lifetime of the policyholder, provided that the premiums are paid on time. Unlike term life insurance, whole life policies also accumulate cash value over time, which can be borrowed against or withdrawn if needed. 

While premiums for whole life insurance tend to be higher than term life policies, the lifelong coverage and cash value accumulation make it a good option for self-employed individuals looking for long-term financial security.

3. Critical Illness Cover

Critical illness cover provides a lump sum payment if the policyholder is diagnosed with a specified critical illness listed in the policy. This can include conditions such as cancer, heart attack, stroke, or organ failure, among others. 

If you’re self-employed and worried that your livelihood may be directly impacted by a serious illness, critical illness cover can offer much-needed financial support during a challenging time, allowing you to focus on recovery without worrying about your finances.

4. Income Protection Insurance

Income protection insurance is designed to replace a portion of the policyholder's income if they are unable to work due to illness or injury. 

When you’re self-employed, your income relies entirely on your ability to work, so income protection insurance can provide invaluable peace of mind. It ensures that you can meet your financial obligations and maintain your standard of living even if you’re unable to work temporarily or long-term due to health reasons.

How to Choose the Right Life Insurance For You

Here are a few important things to think about when choosing the right life insurance for you and your family:

  • Coverage Amount: Determine the amount of coverage needed to adequately protect your family's financial future. Consider things like debts, mortgage payments, and living expenses to figure out how much coverage you need.
  • Premium Affordability: Consider your budget and choose a policy with premiums that you can comfortably afford, making sure you can maintain coverage over the long term without straining your finances.
  • Policy Features: Evaluate the features and benefits offered by different policies, such as flexibility in premium payments, optional riders for additional coverage, and the ability to customise the policy to suit your specific needs.
  • Insurer Reputation: Research the reputation and financial stability of insurance companies before purchasing a policy. Look for insurers with strong financial ratings and a track record of reliable customer service and claims processing.

When choosing the right life insurance option for you, it’s also important to seek professional guidance and advice from a financial expert or professional accountant. 

With our new service for sole traders, CrunchONE, you’ll all get the advice you need from Chartered accountants, who will help you find the right life insurance plan for you - and make smart money saving and management tips all round - at a flexible, affordable price.

Conclusion

Life insurance is an important part of financial planning when you’re self-employed, and a great way to ensure your family stays financially secure and protected.

By understanding the life insurance options available to you as a self-employed person, and picking one that suits your needs, you can make sure your family is protected no matter what happens. 

Whether it's term life, whole life, critical illness cover, or income protection, there's a suitable option for every self-employed individual to give you and your family peace of mind.

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James Waller
Content Specialist
Updated on
February 12, 2024

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