Term insurance for self-employed: Get 10-15X cover, add premium waiver

Sales of term insurance policies to self-employed individuals surged 50 per cent year-on-year in September 2024, with 70 per cent of purchases driven by plans designed specifically for this demographic, according to data published by Policybazaar for sales on its platform.

The growth can partly be attributed to customised term plans that no longer require traditional income verification documents. 
 

“Traditionally, income tax returns and income computations were the primary documents used to determine eligibility,” says Bikash Choudhary, chief actuarial and governance officer, IndiaFirst Life Insurance.

“With flexible and specialised plans, it’s easier for business owners and freelancers to protect their families,” says Rhishabh Garg, head of term insurance, Policybazaar.
 

 

Challenges for self-employed buyers
 

Self-employed individuals often face hurdles in buying term insurance due to financial documentation that doesn’t fully reflect their earnings. This complicates underwriting.
 

“Earnings may appear lower because of business expenses or other irregular income, while the insurance coverage sought is often significantly higher than reported earnings,” says Choudhary.

 

Madhu Burugupalli, senior executive vice president and head of products, Bajaj Allianz Life Insurance, offers an example of a buyer earning Rs 3 lakh annually who seeks coverage of Rs 5 crore. “Insurers will be cautious as there is no justification for such high coverage compared to the income,” he says.
 

Reliance on alternative data growing
 

Insurers are increasingly using alternative data to assess eligibility. According to Burugupalli, inputs such as the buyer’s 

residence, car ownership (whether financed or owned), company turnover, credit score, and loan repayment history are now considered instead of income tax returns (ITRs) and income computations.
 

“Surrogate proofs, such as the Insured Declared Value (IDV) of a vehicle and data from the Goods and Services Tax (GST) database, help insurers evaluate financial stability,” says Garg.

Determining the sum assured
 

The sum assured can be calculated using human life value (HLV), obtained by multiplying annual income by the remaining years of work.
 

A common thumb rule suggests coverage should be 10-15x the annual income. Garg explains that if the family’s annual income is Rs 20 lakh and monthly expense is Rs 80,000 (about Rs 10 lakh annually), at least Rs 1 crore is needed to cover a decade of expenses. “With inflation doubling expenses every decade, this figure rises to Rs 2 crore in the next decade. Therefore, Rs 3 crore in coverage or 15 times the income is ideal, while the minimum needs to be 10 times,” says Garg.
 

Burugupalli adds that the family’s monthly living costs for determining insurance coverage must include school fees, home loans, and other necessities.  
 

Points to keep in mind
 

Self-employed buyers should add riders like waiver of premium and accidental death benefit to their policy. The former ensures future premiums are paid by the insurer in the event of accidental disability or critical illness. “This feature allows the policy to continue even when income drops due to unforeseen circumstances. It’s a low-cost rider,” says Garg.

The accidental death benefit pays a higher amount — up to 100 per cent more — than the coverage, according to Garg.

Select a premium payment plan you are comfortable with. “Choose a plan you can adhere to comfortably, even if unexpected challenges arise,” says Burugupalli. Lastly, Burugupalli stresses the importance of full health disclosure when purchasing term insurance to ensure smooth claims processing.