Insurance: Term plans see 10% surge among self-employed, 41% opt for ULIP

Issuance of term insurance policies to India's self-employed has risen 25 percent between July 2021 and September 2023, as per a report by Policybazaar,based on the company’s internal sales database of nearly 50,000 such customers.

A term insurance policy is one of the simplest and most affordable forms of life insurance that covers the family of the policyholder in the event of his/her unfortunate demise. All that the policyholder needs to do is pay a fixed premium, and if he/she dies during the policy term, his/her nominee(s) receive a fixed amount of money that they can use to continue living their lives keeping financial distress at bay. 

In the past, the issuance of term insurance policies to self-employed individuals faced limitations primarily because the market predominantly catered to salaried individuals. Traditional underwriting practices demanded documentation such as Form 16 and detailed salary structures, created barriers for those with non-salaried income sources. 

"“Recently, insurers have revised underwriting methods - the contemporary approach no longer necessitates income tax return (ITR) or salary proof documentation, thereby broadening access to specialised term insurance plans tailored for self-employed individuals and business owners,” said the Policybazaar study.

A significant increase of 10 per cent in the issuance of term insurance policies for self-employed individuals has been observed from the second quarter of fiscal year 2022 to the second quarter of fiscal year 2023.  In fact there has been a substantial shift towards plans that pose no income proof challenges for self-employed customers. 

The share of such plans has increased to 51 per cent in the first half of 2023, compared to just 36 per cent in the year-ago period.  

Now several digital parameters are being used to assess the financial stability of the individual or business owner, especially in cases where traditional income proofs may be challenging to obtain. One such parameter is the creditworthiness of the individual through their credit or loan history. 

Another way is using surrogate proofs like Insured Declared Value (IDV) of a four-wheeler vehicle (representing the market value of the car) that they own. In some cases, insurers may also check the GST database to ascertain the business value, noted the study. 

"Based on the data, self-employed individuals seem to align with the common practice of opting for term insurance coverage approximately 10 times their annual income. The distribution across income buckets reflects varying levels of coverage preferences, with a notable increase in the average sum insured as income brackets rise. For instance, those with an annual income in the Rs 3-5 lakh bracket typically choose an average sum insured of Rs 39 lakh, while individuals earning between Rs 10-15 lakh opt for an average sum insured of Rs 98 lakh," noted Policybazaar.

" In your thirties, it is recommended to have coverage of up to 10-15 times of your annual income. So, if your annual income is Rs 10 lskh, a cover of Rs 1 crore is required to protect your family from all possible expenses until your retirement age or earning capacity," said Rhishabh Garg, Head - Term Insurance, Policybazaar.com 

The first step to finding the optimal term insurance cover is calculating the post-tax income you contribute to the household after your expenses. Use this number to calculate your total financial contribution to your family up to your retirement age, factoring in inflation, income appreciation, and various financial goals and needs (for example, child education, retirement planning, EMIs, etc.). After that, calculate the present value of the total sum contributed over your earning lifespan. 

Self-employed individuals initiate term plan investments as young as 26, with the age range of 26-40 constituting a significant 68 per cent of the overall self-employed customer base, showed data analaysed by Policybazaar.

"As your liabilities increase, your cover should increase too. You must make a rounded estimation of your financial realities – income, debt, savings, lifestyle, etc. – to derive your life cover. As you progress through various life stages, your financial requirements change. For instance, the financial needs of a 25-year-old single female are different from those of a 40-year-old mother of two. Ideally, you must review your financial portfolio annually. But, to minimize the tediousness, I will advise that you compulsorily review your protection requirements at least after every life milestone like marriage, new home, birth of your baby, etc," said Anup Seth, Chief Distribution Officer Edelweiss Tokio Life insurance.

Within the demographic of term insurance buyers, self-employed males dominate with 89 per cent representation, while females constitute a comparatively smaller share, standing at 11 per cent. 

Maharashtra led in the number of self-employed individuals purchasing term insurance, followed by Delhi and Uttar Pradesh in the North region. Meanwhile, in the South region, Karnataka, Andhra Pradesh, and Tamil Nadu witnessed the highest number of term insurance buyers.

While, Term Insurance policies have seeb a 10 per cent surge among the self employed in the last one year, 41 per cent have still opted for Unit-linked Insurance Plans ( ULIPs)

" ULIPs constitute a significant portion, contributing to a 41% share. Some of the most popular ULIPs are –TATA Smart Sampoorn Raksha-Param Rakshak, HDFC Smart Protect, Bajaj Invest Protect Goal and Max Smart Flexi Protect Solution. All these plans provide a blend of protection and growth without requiring standard income proofs. Traditional ULIPs used to have up to 10 times cover of the annual premium as the objective was returns, but the above-highlighted ULIPs offer a higher life cover of up to 200 times with the primary objective being life covers," noted the study.

However, financial advisors always warn investors against investing in ULIPs since such plans are insurance cum investment products. Neither of them is recommended by them as they offer a sub-optimal combination of insurance and investment. "It is always better to keep insurance and investment separate. If you have financial dependents, the first thing that you should do is to buy a term insurance with an adequate cover. Put the rest of the money in one or two good diversified equity funds. But, what if you are risk averse? In that case, we would suggest you to stick to a term plan & good old PPF. It will still give you better returns than an endowment plan," said Value Research in a note. 

"ULIPs and Savings Plans have higher premiums because they include both insurance and investment components. Since a portion of the premium in ULIPs and Savings Plans is invested, the death benefit is typically lower than what you would get with a term insurance policy. Consumers must be aware of the higher costs and market risks associated with these plans. If your primary goal is financial protection, the term insurance could be the best option due to higher death benefits," said Adhil Shetty, CEO of BankBazaar.