The 6 Life Insurance Options for Self-Employed People

A self-employed career brings freedom, flexibility, and excitement—but without automatic financial protections. Self-employed individuals, such as freelancers and business owners doing their own payroll, lack employee benefits like paid leave, statutory sick pay, and death-in-service payouts.

So, if something were to happen to your health or income, you and your loved ones face significant risk, which makes life insurance a top priority for the self-employed. This article outlines the basics of life insurance for self-employed individuals and the available options in the UK.

Key Takeaways

• Self-employed workers lack access to employee perks such as sick pay and death in service benefits, all while having a less secure income stream.
• You can take out life insurance on a fixed-term basis or a lifetime basis. Additionally, you can cover yourself, your family, and/or your business in the case of illness, the death of a key business associate, and other insurance types.
• Premiums are higher for lengthier terms, whole life policies, and circumstances such as pre-existing health conditions or risky jobs.
• You can hire a financial advisor and use online quote estimators to thoroughly understand your life insurance options and compare between providers and policies.

Why Take Out Life Insurance as a Self-Employed Person?

As a self-employed individual, you don’t have an employer to take out group life cover—also known as death in service benefit. Instead, you need to purchase appropriate insurance yourself.

Life insurance providers pay out a lump sum to your beneficiaries (e.g., your partner or children) if you die within the insurance term. Additional cover, such as income protection, can also be paid out while you’re alive in cases of illness or accident.

Here are the main reasons to get life insurance (and, optionally, additional insurance types) as a self-employed person.

• Varying self-employed income makes it harder to plan for financial stability in the long run. Plus, you may take out business loans to grow your venture. These factors could burden your family were you to pass away.
• A few slower months could endanger your mortgage payments. Additional cover, such as mortgage protection could help you manage this risk.
• Since you lack employed-provided paid leave and sick pay, illness and injury jeopardize your income. Cover such as income protection can offer a financial cushion.

6 Types of Life Insurance for the Self-Employed

There are two primary types of life insurance: term and whole life insurance, which pay out upon death. Additionally, you can get extra cover on top. The main types that self-employed individuals should consider are: critical illness cover, mortgage protection, income protection, and key person insurance.

Here’s what you should know about each type of life insurance.

7 Tips for Choosing the Right Life Insurance When Self-Employed

Now you know what’s out there, how can you best find the right provider and cover for you? Here are seven pro tips.

1. Consider your personal and business risks

Your life and business circumstances determine your life insurance needs, so it’s useful to define these first. As an exercise, put yourself in the insurance provider’s shoes and consider your personal and business risks. This also prepares you for the provider’s questionnaires later on.

First, think about personal circumstances like:

• If you have a partner, kids, and/or other dependents (such as a vulnerable parent)
• Your home mortgage
• Outstanding debts (e.g., credit cards, personal loans)
• Your family’s current and future income needs
• Your health and medical history
• Risky hobbies such as skiing

Then, consider business liabilities including:

• Being in the early days of your freelance career with unstable income
• A business partner (say, your startup co-founder) without whom day-to-day operations are at risk
• Business loans and their maturity (i.e., when the last payment is due)
• Risky investments, such as launching a new product

Note: In the UK, you’re legally required to disclose any relevant risks (such as a terminally ill business partner) to your insurer and answer all its questions truthfully. Otherwise, your policy may be voided and/or your claims denied.

2. Determine your life insurance needs

Before you research insurance providers’ offers, figure out your policy must-haves. Think about basics such as term, policy type (personal and/or business), premium, and payout. This task might feel overwhelming, so here’s how you could break it down.

Brainstorm with a mind map

A mind map is like a spider diagram branching out from the theme at the centre (i.e., life insurance). The first few diagram bubbles around “Life insurance” might be “death”, “illness”, and “debt” (i.e., the risks). Then, “illness” might branch out into bubbles like “treatment costs”, “income loss”, and so on. Reflect on and repeat this exercise to identify your top priorities.

Estimate the key financial figures

Once you identify your insurance areas, put numbers to them so you can effectively research providers’ offers. Here are examples of how to estimate key figures.

• Life insurance payout: Add up the totals for outstanding debt (e.g., mortgages), annual family expenses multiplied by the number of years you want support for, plus future goals (e.g., children’s university fees).
• Life insurance premium: Set a maximum ceiling for your premium by looking at your disposable income (i.e., income after essential spending such as housing, child care, food, transportation, and debt). Decide what feels reasonable to you. As an illustration, the premium could be between 1% and 10% of your disposable income.
• Life insurance term: Calculate the difference in years between now and a key life stage of your choosing, such as when your children finish higher education or the year you pay off your mortgage.
• Income protection cover: First, estimate your essential monthly outgoings, such as mortgage or rent, utility bills, transportation, and child care. Ideally, your income protection policy should cover your basic essentials. Next, estimate your average monthly self-employment earnings. For mid-range earnings (say, between £2,000 and £4,000 per month), you might aim for a cover that’s 50% to 80% of your income.

Note: Longer terms, higher payouts, and a larger percentage of income protection come with higher premiums.

3. Input quote data consistently

You want to compare like for like to get comparable quotes from insurance companies. For instance, a premium for a 20-year term life insurance with a £200,000 payout is likely different from one for a 10-year term with a £100,000 payout.

So, consistently input data including payout amount, term length, and additional cover (e.g., critical illness cover). That said, within the same provider’s quote estimator, you can try out different inputs to check the difference in premiums and conditions.

4. Compare providers’ quotes

A big no-no is going with the first offer that seems attractive. Instead, use a life insurance comparison platform (or have multiple provider sites open) to compare quotes—such as a life insurance + critical illness cover bundle.

Prioritise offers according to how well they meet the premium you can afford and your key terms, such as types of critical illnesses or income replacement. If a certain provider’s premium is lower than another’s for the same cover and terms, that’s a great find. On top of comparing quotes, check claim approval rates (ideal ones are >99%) and read verified customer reviews.

Note: Some providers might offer extra perks to life insurance customers. For instance, they may facilitate discounts with retailers or begin the cover without a medical exam.

5. Double-check relevant terms and exclusions

Once you have a shortlist of, say, three to five quotes, narrow it down further by reading the policy docs. Specifically, check what’s covered and under which conditions, including:

• Whether it covers pre-existing medical conditions
• Which critical illnesses it covers
• Restrictions on payouts for high-risk jobs or hobbies

Also, ensure you’re comfortable with a provider’s claim processes. Check how it describes these on their website. For example, some may request to speak directly to your medical provider for a critical illness claim, increasing waiting time. Plus, check when and how claims are paid out—for instance, before or after you pay a medical bill related to your claim.

6. Prioritise flexibility

Flexible life insurance policies let you apply changes over time as your financial situation or business needs change. For example, your business could grow significantly within the next five years. As a result, you may need to increase your life insurance coverage so your family gets sufficient support.

As an illustration, you may want a policy that offers the flexibility to:

• Upgrade from term to whole life insurance
• Bundle in additional cover, such as income protection, at a later date
• Change the payout beneficiaries
• Extend the term length

7. Hire a financial advisor where necessary

In some cases, it’s worth getting professional advice to avoid going for the wrong policy. These scenarios include having underlying health conditions or a risky job, seeking a large payout for your family, or running a fast-growing business.

Once appointed, the advisor will ask you questions about your personal and business circumstances, and your insurance needs. They then provide tailored recommendations on which life insurance policies and providers best suit you and explain potential limitations, exclusions, and risks.

What To Avoid When Choosing Self-Employed Life Insurance

Be extra careful with these points as you pick your life insurance.

Don’t ignore the fine print

Every word in a quote and policy document is important. Skipping a paragraph or a term you don’t understand—related to exclusions, waiting periods, or payout conditions, for example—can lead to delayed or rejected claims.

Hack: Read the fine print carefully and search for terms you don’t understand. Alternatively, contact the provider’s customer service team or an independent financial advisor.

Don’t under prepare for the earnings assessment

Providers assess your monthly and annual earnings to determine life insurance premiums, payouts, and terms. As you’re self-employed, however, these may fluctuate or may be difficult to back up. (Say, for instance, you earn under the self-assessment threshold and don’t have to file tax returns.) That’s why you must prepare all relevant evidence to support your earnings figure.

Hack: If you’ve been self-employed for many years, then collate three years’ worth of earnings statements (e.g., sole trader or business tax returns). If you’re newly self-employed, provide alternative proof like current or savings account statements, recurring client contracts, or past PAYE payslips.

Don’t over- or under-insure

Over-insuring means you pay too high a premium for the potential outcome. For example, you pay a monthly premium you can’t easily afford for a huge payout with a 10-year term, even though you don’t have a risky job or lifestyle.

Conversely, under-insuring means you’re taking too small a cover even though the needs of your family or business are much larger than the payout. Both cases carry a hefty risk in the short and long term.

Hack: Calculate your optimal coverage by considering both essential and emergency expenses. Use provider-supplied or third-party insurance calculators to strike a balance between affordable premiums and adequate coverage.