Risks and Consequences
Life insurance for contractors provides peace of mind that in the event of your death a cash lump sum will be paid which can be used in a number of ways.
Firstly, the capital paid out under the policy can be used to make provision for your dependents, for example repaying the mortgage on your private residence or funding school or university fees for your children.
Separately, it may be the case that as part of the financing for your consulting practice you have chosen to borrow money and a condition of borrowing may have been that you put in place life cover that would repay the any outstanding debt in the event of your death. In this circumstance the life insurance policy would be assigned to the lender and the payout under the policy would be used firstly to repay the outstanding balance on the loan with any surplus being available as part of your estate.
If you are currently employed it is likely that as part of your package of benefits there is an element of life insurance cover included. Typically this benefit is calculated as a multiple of gross salary payable on death to your dependents.
Life insurance for contractors is flexible and cover can be tailored to meet your personal and business needs.
The core cover is referred to as Level Term Assurance under which a fixed lump sum benefit would be paid in the event of your death during the term of the policy. The term of the policy can range from 10 to 40 years depending on your age at the date of application and your requirements.
Mortgage Protection Term Assurance can be purchased for a period equal to the outstanding repayment period of your personal mortgage. Benefit under the policy (typically referred to as the Sum Assured) can be set to track the outstanding balance of your mortgage during that period giving you peace of mind that in the event of your death there would be a lump sum payable sufficient to clear the outstanding balance.
Decreasing Term Assurance operates in a similar way to Level Term cover except that the Sum Assured reduces by a set amount each year to reach zero at the end of the policy.
This cover will be cheaper than Level Term and may be more suitable given that as you trade for a period of years as an independent consultant you are likely to build substantial cash reserves that can be used to repay mortgages on domestic property or business borrowings.
As a consequence, it is likely that your exposure to debt in later years will be substantially reduced and therefore Level Term cover may provide benefits that are surplus to requirements.
Typically a life insurance product will offer a choice between the payment of a lump sum on death or a regular monthly income to be paid to your surviving family for a specified period of time.
The cost of cover will vary depending on factors such as your age, sex, smoking status and medical history.
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