Term insurance for the self-employed

1. Uneven source of income – While you are on an exciting ride, investing and growing your business multiple times, many entrepreneurs take limited cash back home. Savings and investments are compromised in the short run for the big pot of gold at the end of the tunnel. While there is a high chance you must have ensured there is a financial backup for the rainy days, it is also important that you have adequate financial insurance-backed protection for your family through a term insurance plan.

2. Business liabilities – Apart from household liabilities that a salaried individual is burdened with, an entrepreneur can also be personally liable to debts and liabilities with respect to their business. Your business can have different liabilities at various stages. If your business is in the initial stages, and you may have significant liabilities with respect to long-term loans for expanding your business, or for working capital financing like securing raw materials, it is important to have a term insurance to ensure your family is not saddled with such huge loans if  tragedy strikes.

How to buy term insurance?

Now that we have got the importance of a term insurance plan out of the way, let’s quickly look at a few important pointers to keep in mind while selecting and buying a term insurance plan for a self-employed individual.

1. Adequate sum assured: Before buying a term insurance plan, ensure that you decide upon an adequate cover in the form of sum assured in your term insurance policy. Your sum assured should be equivalent to all your outstanding loans, liabilities and expenses required to maintain the current lifestyle and fulfilling life goals like children’s education, marriage and your retirement.

2. Policy term: Being self-employed, you are surely going to be working more than a salaried individual. On an average, a salaried individual works till the age of 60 years. A self-employed individual would work for maybe another 10 years. Ensure you look for a plan that covers you till the age of 85 years at least.

3. Premium payment term: A regular premium payment option is the best for the salaried class individuals as they have a regular source of income. On the other hand, for self-employed individuals, it is important to pay off all premiums as early as possible, by option of limited premium payment term options. Through this option, one can pay for the entire policy term just within a few years and be worry-free.

4. Declarations and medical tests: At the time of buying a term insurance plan, ensure that you fill the proposal form with complete and correct information about yourself. You should undergo the medical tests as required by the insurer. This ensures that the insurer is fully aware of your medical condition and you have not suppressed any facts about your health or pre-existing diseases. This will also help your loved ones when the claim arises.

5. Financial underwriting: This is one of the most critical parts of the term insurance application process for the self-employed, where many applications drop off or get rejected. Like in the case of long-term loans, insurers usually require higher amount of paper-work to understand the financial standing of a self-employed individual before offering them a term life insurance cover. You are required to submit your Income Tax return along with the computation of income and bank statements for the last three years.

Alternative cover eligibility documents: Insurers have understood the constraint around the non-availability of high coverage, and recently started offering covers on alternative documents other than ITR to self-employed individuals to increase their cover eligibility.

Some of these available options are as follows:

A. Based on Annual Income Calculations:
- As a multiple of the Ex-showroom price of your car.
- As a multiple of the monthly SIP in mutual funds.
- As a multiple of your credit card limit.
- As a multiple of the monthly EMI on your home loan.

B. Based on calculations of the asset owned:
- Sum assured eligibility amounting to 50 percent of the house/shop owned by you having a value of up to maximum Rs 2 crore.
- Sum assured amounting to 1.5 times the mutual fund/fixed deposit/portfolio statements as held by you.

While there are numerous challenges in running a business, one can get rid of the risk of leaving behind unattended responsibilities and liabilities for their family by taking a term insurance plan. A term insurance plan is designed for everyone, be it salaried or self-employed. It serves as a cushion for family members in your absence.

The author is  director- health, life and strategic initiatives of Coverfox.com