Introduction

In India, mostly it is not possible to obtain term insurance plans without providing income proof. The requirement for income documents is based on two primary reasons:

  • Policy Qualification: Income proof determines the eligible policy type and coverage based on the individual's income level.
  • Affordability Assessment: Income proof demonstrates the ability to afford monthly/ Annual premiums, ensuring the policyholder can meet financial obligations comfortably.

Now, let's delve deeper into why income proof is a mandatory requirement when acquiring term insurance and explore any exceptions for the same, if any.

What is Income Proof?

In essence, income proof refers to the documentation that confirms an individual's employment and full-time salary. Luckily, there are various types of documents available that can serve as evidence of income. Read on for a compilation of these documents.

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Documents Required to Purchase a Term Insurance Plan

  Photo

Passport-size photographs

  Identification proof

Aadhaar card, passport, driving licence, voter ID card, PAN card, ID issued by a government body

  Proof of address

Aadhaar card, ration card, recent utility bills, passport, bank account statement, letter from a recognised public authority, driving licence

  Medical proof

Medical Reports

  Income Proof

  • Income tax returns,(last 3 years)

  • salary slips (last 3-6 months)

  • Bank statement (last 3-6 months)

  • employer’s certificate (for PSUs),

  • latest employment contract letter,

  • Income Tax assessment order,

  • Form 16,

  • CA’s certificate showing income of past 3 years, etc.

Can Term Insurance Be Purchased Without Providing Income Proof?

  • Income Proof is Essential for Financial Underwriting. Whether you choose to purchase term insurance through an insurance broker or online, proof of income is mandatory. The purpose is to ensure that the policyholder meets the minimum income requirement for term insurance.
  • Complying with Required Documentation to Avoid Issues. Furthermore, verifying your income eliminates complications when it comes to policy payments and reduces the likelihood of having your insurance claim denied. The last thing anyone wants is to face a denied claim during a challenging period for their family.
  • However, the Insurance Regulatory and Development Authority of India (IRDAI) has introduced Saral Jeevan Bima, a standardised term insurance product that does not require income proof. It is worth noting that these plans can be challenging to obtain, as insurers are generally not enthusiastic about selling them.

Why is Income Proof Important for term insurance?

Insurance companies require proof of income for financial underwriting. These documents are carefully examined by insurers for the following reasons:

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  • Determining Coverage and Premium Rates: Income proof helps insurers assess the appropriate sum assured or total life coverage that can be offered to the applicant. It also aids in determining the premium rates for the policy.
  • Assessing Affordability: Income proof documents assist insurers in evaluating whether the applicant will be able to afford the term insurance premiums. By reviewing the submitted documents, insurers can determine if the individual's financial capacity aligns with the premium payments.
  • Preventing Over-Insurance: Income proof acts as a safeguard against over-insurance, where an individual purchases coverage that exceeds their financial means. Over-insurance can lead to financial strain as the individual may struggle to pay the premiums.
  • Avoiding Policy Lapse and Claim Denial: Inaccuracies or discrepancies in the income statement can result in policy lapses or the denial of insurance claims. Submitting valid income proof when obtaining term insurance helps avoid such situations.

In summary, income proof plays a vital role in determining coverage, setting premium rates, assessing affordability, preventing over-insurance, and ensuring policy compliance to avoid claim denials or lapses.

Why do insurers ask for income proof?

Insurance companies ask for income proof to determine eligibility for term insurance and prevent fraudulent claims. Fraud occurs when someone seeks excessive coverage beyond their needs. By verifying income, insurers can accurately assess risk.

Impact of income on term insurance coverage: Income is a crucial factor in determining eligibility and coverage. Insurers calculate the maximum coverage based on income and age, using factors like 25X, 20X, or 15X income. For example, let's consider an individual named Mr. X, aged 30, with an annual income of INR 24 lakhs. If he applies for a term insurance plan from Insurance Company A, the coverage limit would be 20 times his annual income.

Here is a table that summarises how income impacts term insurance coverage:

Factor

Example

  Income

  INR 24 lakhs

  Maximum term insurance coverage

  INR 4.8 crores (if you are 30 years old)

  Existing life insurance policy

  INR 3 crores

  Maximum term insurance coverage

  INR 1.8 crores (4.8 crores - 3 crores)

In summary,

  • Income proof is required to determine eligibility for term insurance and prevent fraud.
  • Insurers calculate coverage based on income and age.
  • Existing policies reduce the maximum coverage amount.

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Conclusion

In conclusion, purchasing term insurance without income proof is not generally possible. Income proof serves as a crucial requirement for insurers to assess eligibility, coverage, and affordability. While there are exceptions, such as the IRDAI's Saral Jeevan Bima, it may be challenging to acquire. For most term insurance policies, providing valid income proof is essential to ensure a smooth process and avoid complications with claims or policy lapses. Remember, submitting income proof helps you make a well-informed decision and protects your family's financial future.