Gemma Holloway of award-winning life insurance broker Reassured explains why life insurance is a must for small business owners and the self-employed.
Many people who run their own business have numerous forms of insurance: public liability, income protection and contents insurance being just a few. But one form of insurance that is often overlooked by this demographic is life insurance.
Why is life insurance important?
Without life insurance, business owners and those who are self-employed risk burdening their loved ones financially if the worst were to happen to them.
Upon passing, not only will your loved ones have to worry about covering the loss of your income, but there will be the added cost of your funeral and any loans taken out in your name, business or personal, which will need to be settled from your estate.
This could leave your loved ones experiencing further financial strain at an already challenging time.
Why is life insurance more important if you are self-employed?
With 15% of the UK’s workforce now being self-employed, this opens a large proportion of the population to increased vulnerabilities if something were to happen to them.
The usual issues would also apply. Would your loved ones be able to pay off the mortgage, cover the cost of your funeral or meet day-to-day living costs, for example? But those who are self-employed wouldn’t receive the same benefits as if they were employed.
For example, it is common when working for an organisation to receive death in service. This means that if you were to pass away whilst still in service, your loved ones would receive a multiple of your salary (usually 2-4 times your annual earnings).
Unfortunately, when self-employed, you will not receive this benefit meaning that if you were to pass away and had no life protection cover in place, your family would be left with no financial aid, highlighting the increased need for life insurance.
What type of cover do I need?
The type of life insurance cover you require will depend on what you are looking to cover. Being self-employed or a business owner will not affect the type of policies available to you.
When choosing the best solution to meet your needs, it is important to consider what it is you are looking to protect and the best type of cover to provide that. Term-based cover is only valid for a set period of time and provides your loved ones with a lump sum payout upon your death.
However, if the term expires before a claim is made, the cover is no longer valid and all premiums paid into the policy are lost. Level term-based cover offers a fixed lump sum pay out, meaning that regardless of when in the policy you pass away, your loved ones will receive a fixed amount. This is ideal for covering balances that don’t fluctuate, such as an interest-only mortgage, inheritance, funeral cost or day-to-day living costs.
Decreasing term life insurance, on the other hand, provides a lump sum pay out that decreases over time. It tends to be cheaper as the risk to the insurer reduces over time, making it ideal for covering a repayment mortgage or outstanding debt in your name where the balance of the debt decreases over time. This is also ideal cover for any business loans outstanding in your name.
Alternative forms of cover include family income benefit or life assurance.
Family income benefit lasts for a specified period of time but, opposed to providing your loved ones with a lump sum payout, it provides your family with an ongoing tax-free, monthly income. Again, this tends to be cheaper as the risk to the insurer decreases throughout the life of the policy because the further into the policy you pass away, the fewer months they will be required to make payments.
Life assurance guarantees a payout to your loved ones because it lasts for the rest of your life and comes in the form of whole of life cover and an over-50s plan. Due to the guarantee of a payout being made, it tends to be the most expensive form of insurance.
Whole of life insurance involves providing medical information and making premium payments for the rest of your life. The available sum assured tends to mirror that of term-based life insurance and when you die a payout will be made to your loved ones. This payout is similar to that of a level term policy, making it best suited to similar factors.
Over-50s plans, on the other hand, tend to offer a much lower sum assured as no medical information is collected. Therefore, to mitigate the risk to the insurer, the cover offered is of lower value but the cost of premiums not less. As a result, an over-50s plan is not ideal for offering protection on large outgoings, but usually best suited to covering funeral costs or a small inheritance.
As you can see, there are a wide range of products available to you even if you are self-employed or a business owner. Therefore, to determine the best type of cover for you, it is essential to identify what you are looking to cover.
How much cover do I need?
The amount of life insurance cover you require will be determined by what you are looking to protect.
It is important to consider the financial impact of your lost salary, outstanding debts in your name (including business loans), and any day-to-day living costs needed to support your family. You can then be certain that the level of cover you arrange is adequate to secure the financial future of your loved ones.
Arranging life insurance when self-employed or as a business owner
Whether you run your own business or are self-employed, the process of arranging life insurance is no different. It is always beneficial to compare quotes to ensure you obtain the best deal and the cost of your month premiums will be based on the standard factors. If you die during the term of your cover, your loved ones will be able to make a claim.
For all intents and purposes, your employment status will not affect the terms and conditions of the cover. The one exception to this is if your line of work is particularly dangerous. Working at excessive height, lifting extreme amounts or working with certain substances can increase the cost of your premiums due to the increased risk.
However, this will all be covered during the application process and will not be affected by whether you are employed or self-employed.
Do I need life insurance or key persons insurance?
Key persons insurance tends to be arranged within a business setting, protecting all of the key stakeholders to ensure that if one of them were to pass away, the business would be able to continue to function financially.
It tends to be used to protect the wellbeing of a business as opposed to personal relationships, such as family. Therefore, when choosing between key persons insurance and life insurance it is imperative to determine who it is you are looking to protect.
In the instance of wanting to protect your loved ones and business, it is likely that arranging both policy types simultaneously is the best solution.
Short-term life insurance
Occasionally, as a business owner or self-employed worker, it may be beneficial to arrange short-term life insurance as an additional layer of protection to your existing long term policy.
This type of cover is typically arranged for a maximum of 12 months. While it tends to be more expensive, it is ideal for providing extra protection during particularly large business transactions.
Securing the best monthly premium
Both cost and cover will vary significantly between insurers, therefore making it essential to compare quotes to ensure you receive the best deal.
Using an independent life insurance broker, like Reassured, will allow you to effortlessly compare a wide variety of UK insurers regardless of your employment status.
Gemma Holloway writes for Reassured, an award-winning life insurance broker registered with the FCA.
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