&w=1024&resize=1024,0&ssl=1 "Self-Employed Term Insurance: Get 10-15X Cover, Add Premium Waiver | personal finances")
Sales of term insurance policies for the self-employed increased by 50% year-on-year in September 2024, with 70% of purchases resulting from plans designed specifically for this demographic, according to data published by PolicyBazar on its sales platform.
The growth can be partially attributed to individual term plans, which no longer require traditional proof of income.
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“Traditionally, the main documents used to determine eligibility have been tax returns and income calculations,” said Vikas Chaudhary, director of actuarial and governance at India First Life Insurance.
Rishabh Garg, Director, Term Insurance, PolicyBazar, said, “With flexible and specialized plans, business owners and freelancers can easily protect their families.
Challenges for self-employed buyers
Self-employed people often face barriers to purchasing term insurance due to financial records that do not fully reflect their earnings. This complicates underwriting.
“Earnings may appear lower due to business expenses or other irregular income, while the insurance coverage requested is often much higher than reported earnings,” Chowdhury said.
Madhu Burugupalli, senior executive vice president and head of product at Bajaj Allianz Life Insurance, gives the example of a buyer earning Rs 3 lakh per annum who wants a cover of Rs 5 crore. “Insurers will be cautious because there is no justification for such high coverage relative to income,” he says.
Increasing reliance on alternative data
Insurers are increasingly using alternative data to assess eligibility. According to Burugupalli, the contribution comes from the buyer
Residency, car ownership (financed or owned), business turnover, credit score and loan repayment history are now taken into account instead of income tax return (ITR) and income calculation.
“Substitute evidence such as the insured declared value (IDV) of the vehicle and data from the Goods and Services Tax (GST) database helps insurers assess financial stability,” says Garg.
Determine the insurance amount
The sum insured can be calculated by using the human life value (HLV) obtained by multiplying the annual income by the remaining working years.
A general rule of thumb suggests that your insurance coverage should be 10-15 times your annual income. Garg explains that if a family's annual income is Rs 20 lakh and monthly expenses are Rs 80,000 (around Rs 10 lakh per year), then at least Rs 1 crore is needed to cover the expenses for a decade. “With inflation doubling every decade, the figure will go up to Rs 2 crore in the next decade. Therefore, an amount of Rs 3 crore, i.e. 15 times of income, is ideal in terms of insurance, while the minimum value has to be 10 times,” says Garg.
Burugupalli added that a family's monthly expenses must include school fees, home loans and other necessary expenses to determine insurance coverage.
Points to remember
Self-employed people should add additional features to their policies, such as premium waiver and accidental death benefit. The former guarantees that future premiums will be paid by the insurer in the event of an accident or serious illness. “This feature allows you to continue your policy even if your income drops due to unforeseen circumstances. It is an affordable vehicle,” Garg said.
According to Garg, accidental death benefits pay out more – up to 100 percent more – than insurance.
Choose the premium payment plan that suits you. “Choose a plan that you can comfortably follow even when unexpected challenges arise,” says Burugupalli. Finally, Burugupalli emphasizes the importance of providing complete health information when purchasing term insurance to ensure smooth claims processing.
