Being your boss, being an entrepreneur, or building a business empire - all sound incredibly enticing, provided you are ready for the financial ups and downs that come with the territory. Your finances are at the mercy of market fluctuations and losses are as easy to come by, as are profits.
Under such circumstances, one of the primary things that you want to ensure is the financial safety and security of your loved ones and term insurance plans can be a great step, especially in the case of your unfortunate absence.
However, term insurance companies are usually hesitant to extend plans to self-employed individuals since it becomes hard for them to accurately predict the human life value. This is because of-
- The fluctuating nature of their income & lack of occupational stability
- The probability of under-reporting of business details that interrupts the transparency of the financial details of the applicant
- The limited financial history in case the applicant’s business is comparatively new
- The slim income documentation as compared to salaried individuals
However, despite these issues, term insurer companies do provide term insurance policies to self-employed individuals albeit with a few terms and conditions.
Best-Term Insurance Plans for Self-Employed Individuals
| Plans | Available Riders | Sum Assured |
|---|---|---|
| ICICI Pru iProtect Smart |
Critical Illness Accidental Death Benefit Life Stage Benefit (Inbuilt) |
Up to ₹1 Crore |
| HDFC Life Click2Protect Super |
Zero Cost Option Critical Illness Accidental Death Benefit Total Permanent Disability Benefit Inflation Protection |
Up to ₹3 Crore |
| Max Life Smart Secure Plus |
Zero cost option Return of premium plan Disability benefit Accidental death benefit |
Up to ₹2 Crore |
| Tata AIA Maha Raksha Supreme |
Accidental death benefit Life stage benefit Critical illness benefit Total permanent disability benefit |
₹2 Crore and above |
Should Self-Employed Individuals Opt for Term Insurance Plans?
If you are self-employed, then you know this - your source of income is unstable and is subject to market risks and fluctuations. Even if you are a financially smart individual who keeps their personal and business corpus separate, you still have one issue - in case you pass away, how does your family deal with the financial gap left behind? Well, this is where a term insurance plan comes in -
- A term insurance cover can be used to meet business obligations (loans + debts)
Sujit is a 35-year-old entrepreneur in the real estate business and he has to routinely borrow a lot of money on a personal basis to keep his business running.
Months later, Sujit's business collapsed and a fatal cardiac event claimed his life, leaving his wife, child, and ageing parents to contend with relentless pressure from creditors, partners, and business clients.
What could have helped Sujit was a term insurance plan that offers adequate coverage over nominal premiums. As a real estate business owner, he could have easily allocated a few thousand bucks annually to secure a cover of several crores, serving as his family's fail-safe in unforeseen events.
2. The sum assured acts as a stable financial protection for the family
Taking a cue from the example cited above, Sujit didn’t just leave behind a business empire that needed cash rolling, he also had a family of 5. The family comprises
- Ageing parents who may need additional medical attention in the future
- A child, who needs to complete his/her education and then a few years to get financially independent (also there are other major life stage events like weddings, etc.), and
- A spouse who has to fend off the lenders, manage household expenses, keep the business rolling, and keep a certain sum aside for her senior years.
Even if Sujit had a savings account set aside, the money would be consumed in handling the financial crisis created in his business. Not much would be left for his family, at least not for the long run.
On the other hand, if the family had the reassurance of a term insurance cover, it would suffice in meeting both his family’s and business requirements.
3. Vanilla term insurance plan + Suitable riders = Guaranteed financial security
While term insurance plans are available and are pretty efficient in their vanilla form, opting for a suitable set of riders makes the plan customised to your needs. For example, as a self-employed individual, you are at risk of -
- Accidents due to frequent travel plans - As a business owner, you are likely to travel frequently. Unfortunate as it is, such schedules also make accidents a possibility.
Under such circumstances, it’s best to opt for an Accidental Death Benefit rider that would offer your family an additional sum assured that is up and above your stipulated term coverage, in case the death is caused by an accident.
Now, while the rider offers you an additional cover, please don’t make adjustments to your base plan based on this rider.
For example, if you have a base term plan of ₹2 crores and then opt for an Accidental Death Benefit rider of ₹50 lakhs, please don’t reduce your cover to ₹1.5 crores.
Remember, accidents are just 1 specific cause of death. In case, it’s a natural death, or for any other reason, your family will be stuck with a reduced cover.
- Critical/Terminal ailments owing to chances of compromised lifestyle - Most humans don’t necessarily have a healthy lifestyle because of the kind of work we do. Hence, lifestyle ailments like diabetes and high blood pressure often lead to critical and terminal illnesses.
Now, -
(i) If you are diagnosed with any of the listed critical ailments, a Critical Illness Rider will help you with a lump sum amount (or a staggered payout, as preferred), which can be used to treat your ailment or make some adjustments in your business finances, or create savings for your family - as you see fit.
(ii) In case your doctor declares (in a written form) that you have a terminal ailment, your term insurer, under the Terminal Illness Rider, will disburse the entire cover amount so that you can put it to any use that you find suitable.
- Disabilities due to sudden accidents - As a business owner, when you look at a term insurance plan, you would want to go for a higher cover amount. After all, you have to think about your family and business. Now, term insurance plans, in general, are pretty pocket-friendly, despite the substantial cover amount that the insurer extends.
But, if you are looking at too high a cover amount (provided that you are found eligible for the same), the premiums will be higher than usual. And now, what if an accident finds you incapacitated and thus unable to pay off your premium?
Well, a rider like the Waiver of Premium will help your family enjoy access to your term insurance coverage despite you missing out on your premiums, in the event of your death.
Now, why would you NOT opt for this rider, eh?
Self-Employed Individuals and Term Insurance Plans
- How does the term insurer determine the cover amount for Self-Employed Individuals?
The million dollar question, in the case of term insurance for self-employed individuals, is, since the income amount for business owners is a fluctuating sum, how do insurers determine the cover amount?
Imagine this -
Amisha is a 36-year-old with a diverse portfolio of business dealings. Over a year, her income profile looks like this -
- From business = ₹25 lakhs
- From rent = ₹10 lakhs
- From interest = ₹2 lakhs
- Total income = ₹37 lakhs
Amisha’s term insurer will only consider the income from the business, i.e., ₹25 lakhs when computing the cover amount since the rest of the income profiles are unstable and subject to changes.
2. What documents are required for a term insurance plan for Self-Employed Individuals?
When applying for a term insurance plan, self-employed individuals need to stay prepared with the following documents -
- ITR of last 3 years + Computation of the income (average of 3 years)
- CA certified P&L account and Audited balance sheet of the last 3 years
- PAN Card
- Permanent or Current Address Proof (Aadhaar card / Passport / Voter ID / Driving licence)
- Latest Photograph
- Other life insurance policy information (if any)
- COVID vaccination dates and certificates (vary from one insurer to another)
- NEFT Document (Cancelled cheque/Bank statement with - A/c holder name, MICR, IFSC & A/c number) - (vary from one insurer to another)
3. What premium payment options should you choose for a term insurance plan for Self-Employed Individuals?
The current financial standing of an individual influences the premium payout mode that he/she opts for. Accordingly, the term insurance provider offers you 3 options - Single, Regular, and Limited.
Let’s take an example to understand this better -
Ajit is a 25-year-old businessman who has opted for a ₹2 crore cover that extends coverage till he is 65 years old.
| PAYOUT OPTIONS | SINGLE PAYOUT | REGULAR PAYOUT | LIMITED PAYOUT |
|---|---|---|---|
| DESCRIPTIONS | The term insurer will calculate the total premium for 40 years (25 to 65 years) and Ajit will pay off the entire amount in one -go. | Ajit will pay the premiums on a yearly/monthly/quarterly basis across the complete tenure of the policy (till he is 65 years old). | Ajit has a policy tenure of 40 years but wants to pay off the entire premium within the next 10 years. The term insurer computes the premium accordingly. |
| PROS | Considering Ajit pays off the entire premium over a single pay, the insurer offers a discount on the total amount. | An affordable option that is suitable for all. |
|
| CONS | While for a self-employed individual paying this amount might be possible, taking out such a massive amount at one go might not be a financially smart move. | Stretching the premium payment across the tenure is a risky move since losses and sudden unforeseen events might hinder the regular payment of premiums, leading to a lapse in the term insurance plan. | - |
Conclusion
As an entrepreneur, your financial standing, goals, and structures differ from that of a salaried individual. When you prepare a corpus to act as your financial substitute in the event of your death, you should prioritise both your family and your business. In the interest of such niche financial planning, it is best if you approach an insurance expert who can help you plan the best possible cover and tenure for your term insurance policy.