Buying Term Life Insurance For The Self-Employed
With remote working becoming a norm during the pandemic, more and more individuals are exploring work as freelancers, gig-workers, solopreneurs and independent consultants. All these types of work will fall under the category of self-employment. India’s gig-economy, driven by such self-employed individuals is expected to grow rapidly and reach a valuation of over USD 455 billion by 2023.
While being self-employed comes with several attractive benefits - work on your own terms, take holidays anytime you’d like etc. - there are some downsides too. The main downside is that self-employment might not provide you a steady monthly income, like a job would. Your clients might not always pay on time, and If you’re planning to start-up, there’s a risk of failure; leaving you, and your family without sufficient income.
As you start on your self-employment journey, you must acknowledge that these financial risks are real, and prepare for them with a strong plan.
How will a term insurance plan help self-employed individuals?
Regardless of whether you’re salaried or are self-employed - a term insurance policy can help you secure your family’s future. Being self-employed however, there are some additional risks you should pay attention to.
Loans and liabilities: Your personal loans are on one side. When you’re self-employed, you might have additional business loans and liabilities that might burden your family even more, in case of your untimely death.
Uneven income: You might end up taking pay-cuts to ensure that your team and business keeps running. This will mean unpredictable income and savings for your family.
Depletion of rainy day funds: You might put all your savings as working capital, to kickstart your business. As a result, your family might be left without their rainy day funds, should the need arise.
So you see, as a self-employed person, you’ll have a wider variety or risks you’ll need to cover for - to keep your family financially protected, in the long-term. And, the most cost-efficient way to do this is to take a term-insurance policy.
How will a term insurance policy help?
In case of your untimely death, a term insurance policy will pay a large amount of money to your family - so they can retain their lifestyle, pay off any pending loans, as well as pay for any major life-events such as higher education, weddings etc.
Things you should keep in mind, while taking a term insurance policy:
1. Adequate cover amount: Do not follow any thumb-rules to decide the appropriate cover amount, especially if you are self-employed. You can use our term insurance calculator and carefully evaluate how much cover your family would need, in case your death occurs during the term. Remember to include all personal and business loans that you’d be liable for, as well as all short-term and long-term financial needs of your family to keep their current lifestyle and to fulfil life goals like higher education and weddings.
2. Cover duration: Generally speaking, self-employed individuals work until a later age, compared to their salaried counterparts. To address this, we recommend that you take a policy for a longer duration, too - at least until you’re 85 years old.
3. Premium payment term: A regular pay option (where premiums are paid throughout the term) is more suitable for salaried employees. On the other hand, self-employed people like you, should consider using limited pay options to pay off the premiums as early in life as possible, while your income is on a rise. Once this premium term is completed, you can remain worry-free and enjoy the cover for the rest of the term, regardless of any changes in your earnings/ profits.
4. Declarations and medical tests: In addition to all the above, you should also be super careful about providing detailed and truthful information about your medical history and pre-existing conditions to the best of your knowledge. The insurer might ask for a medical test to check the status of your health. But remember, that a clear medical test doesn’t mean that you can hide any other existing conditions from the insurer, as they will still rely on your declarations to make a decision. So, always be truthful and honest. This will also ensure that your family gets the claim amount, without any hassles.
5. Claim payout options: We’ve heard of several families receiving a huge claim amount to their bank accounts at once, and losing it all in bad investments. To ensure that this doesn’t happen to your family, you should choose an appropriate payout model, as follows.
Lump-sum - If you’d like your family to receive all the amount at once, and are confident they can manage it effectively. This can be helpful if most of the claim amount will be spent on paying off loans immediately.
Monthly income - It is suitable if your family isn’t very well-versed with money management. This can be helpful, if you’re taking the term policy to provide only for regular household expenses for your family.
Lump-sum + Monthly income: This combination is helpful if you have loans to be paid off in the short-term, plus want to provide regular income for your family’s monthly needs, in the long-term. This is also suitable if your family isn’t financially well-versed.
6. Married Women’s Property Act: If you have loans and liabilities (including personal and business loans), the claim amount is first paid to your creditors, even before it reaches your family. To avoid this, you can sign a simple addendum at the time of taking your term insurance policy called the - Married Women’s Property Act (MWP). This will ensure that your claim amount reaches your wife and kids before anyone else. Remember, the MWP Act can only be added at the time of purchasing the policy and never later.
7. Standing instructions for premium payments: As a self-employed person, you might have a very busy and chaotic lifestyle. And, you might forget to pay a premium on time, causing your policy to lapse. To avoid this, always put a standing instruction so the premiums reach the insurer on time. Further, it is better to put these standing instructions on a bank account, instead of credit/ debit cards - as it is possible that the premiums get delayed when the cards expire/ renew, and you miss out on paying your premiums.
What is financial underwriting, and why is it important?
Before giving you a term insurance policy, the insurer would want to clearly understand your financial standing, more so - if you’re self-employed. They will need to know your annual earnings and any long-term loans along with detailed documentation of your bank statements, income tax returns (ITR) and computation of income (COI) for the last three financial years.
This is one of the most critical pieces of information the insurer checks before providing you a term cover. And hence, failing to provide detailed inputs might get your proposal rejected.
What can you do if you do not have income tax returns or any income documents?
With the rise of the number of self-employed and solopreneurs trying to get term insurance, insurers have understood that such individuals have constraints around non-availability of income documents. For these cases, some insurers today offer term policies on the basis of some alternative proofs.
Some insurers accept a Form 26AS when ITR (Income tax returns) or COI (Computation of income) are not available. A few insurers accept a bank statement of the current account, as proof of income, if the other documents are not available
You might need to request for a list of acceptable income documents from your insurance company, before applying for a policy.
How should I approach term insurance if I’m currently employed, but plan to start-up soon?
If you’re currently on a fixed monthly salary, you should buy a policy of the maximum cover you’re eligible for (or upgrade in case you already have one), before resigning from this company.
Here’s why. Once you leave the company and become self-employed, your finances might become erratic and your income is likely to reduce. Insurers use your annual income proofs (ITR, COI and bank statements etc.) to fix your maximum cover eligibility - and with a drop in your annual income, this eligibility will drop too. So, it is better to take the maximum possible cover, before you leave the job.
Further, here are some quick tips.
- Get all your documents such as ITR, COI & bank statements in order, well in advance. Insurers will scrutinize them thoroughly before issuing your policy - especially if you’re self-employed.
- Buy a cover upto at least 85 years of age
- Choose the limited pay option for premium payments
- If married and male, choose the Married Women’s Property (MWP) Act, so your family gets the claim amount before your creditors
- Based on the financial comfort of your family, choose a suitable claim payout option - lump-sum or monthly income or a combination of both.
- Ensure you put standing instructions on a bank account for automatic payments, so all premiums reach the insurer on time.
What about return-of-premium and money-back policies?
Return-of-premium and money-back policies are both life insurance plans that are attractive to many self-employed individuals, as you can get some amount back, if you are alive at the end of the term.
Having said that, you should remember that both these plans come with several limitations.
Return-of-premium policies could have as much as 70-80% higher premiums (compared to a regular term plan), without substantial net return. The returns are slightly better if you choose a longer policy duration - say upto 80/ 85 years of age. But it is highly unlikely that you might live this long, and get your premiums back. Further choosing such a plan might put limitations on your base plan’s customization options like claim payout, limited pay options, riders etc.
Money-back policies on the other hand have limitations with respect to policy term duration (maximum is 30 years), plus the sum assured and returns are very less too. This means the cover amount paid to your family might not be sufficient to meet all your family’s needs and settle your liabilities.
Keeping these points in mind, we do not recommend buying either of these policies.
To sum up, as a self-employed person it is extremely important that you cover the financial risk of your untimely death with an adequate term insurance policy.
This article should have helped you gain enough clarity with respect to the choices you’ll need to make at various stages of your journey.
If you still have a question, do post it on our forum and get a response from an expert in 6-8 hours.
- As a self-employed person, you'll have to consider additional risks, while calculating a term insurance cover.
- Choose a longer duration for the cover, as you most likely will also work until a later age.
- If married and male, choose the Married Women's Property Act (MWP) to insulate your claim from loans and liabilities.
- Get a list of documents and income proofs needed from the insurer well in advance, so you have them all at one place.
- If currently employed (and planning to become self-employed soon), upgrade your term insurance to the maximum eligibility, before you resign.
Beshak's go-to research geek. Always scanning insurance products and websites. Rich exposure to the entire spectrum of insurance products. He was last a Product Analyst at Coverfox.