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There are two types of standard life cover for contractors and freelancers. They are ‘term assurance’ and ‘whole of live’ cover. In essence, this type of cover replaces the ‘death in service’ benefits that direct employees enjoy.
There are distinct similarities and differences between the two. Which of them you decide is right for you will depend very much on other financial factors you have primed for your future.
What’s the length of cover?
‘Term assurance’ insures your life for a preset duration. You choose that window, and may want to set the end date to coincide with one of life’s milestones.
‘Whole of Life’ cover is exactly that. You take out a policy, pay the premiums right up until you die and it pays out to your loved ones.
How much should I leave?
In both instances, you can decide how much of a payout you want to bequest. If you’re older and have savings, a pension and little/nothing owing on your mortgage, you may decide to leave a nominal amount.
If you’re younger and have not set anything aside for your future, you may want to increase the stakes. There’s no point taking out contractor life cover if it’s only going to do half a job.
Do bear in mind that Term Assurance can pay out on diagnosis of a terminal illness. If you want to make your final days more comfortable or enjoyable, work that into your figures.
Are my survivors guaranteed a payout?
The main difference between the two plans, apart from the term, is the payout itself.
If you take out term assurance but don’t die within the parameters you set, there is no cash-in value. As you’ve survived the term, the hope is that you’ve set aside enough elsewhere for a comfortable lifestyle into retirement.
With ‘Whole of Life’ contractor cover, a payout is guaranteed. You may not reap the benefits yourself, but knowing that your dependants are cared for is a huge peace of mind. It lets you get on with running your business, not worrying about ‘the worst that could happen’.
Bonus tip: life cover can almost pay for itself
You may begrudge paying for cover from which you’re never likely to see any direct benefit. The thing is, you can (often) make a contractor’s standard life insurance policy pay for itself by channelling it through your limited company.
As it stands, if you have a legacy life cover policy from an employed role, you’re used to paying premiums after tax. Now that you’re a limited company owner, your company can pay those premiums.
The premiums are not classed as income, so subject to neither Tax nor NICs. you may even be able to claim them as expenses. And as the pay out will come via your company, they’re not subject to Inheritance Tax, either.
There are more intricate plans, like Relevant Life Cover. That’s something you could look into once you’re an established contractor business. For now, standard life cover is a fast, simple way to provide cover in the event of your death from the outset. We’re here to help you do just that.