Self-employed usually undergo income fluctuations which could be another reason for insurers to view them as high-risk applicants, resulting in either higher premiums or policy rejection
Earlier, self-employed individuals faced unique challenges in securing term insurance, primarily due to the absence of conventional income documentation. Unlike salaried individuals who can present salary slips or Form 16, self-employed people used to rely on alternative proofs like GST filings, bank statements, or credit histories. However, that’s changed now.
“The requirement for traditional income documentation, such as Income Tax Returns (ITRs) or salary proofs, has been removed. This shift has expanded access to specialized term insurance plans, making them more inclusive and accessible for self-employed individuals,” says Rhishabh Garg, Head of Term Insurance, Policybazaar.com.
Having said that, self-employed individuals may still often face challenges while securing a term insurance policy and one of the primary reasons include issues related to income verification. “Unlike any salaried individuals, they lack some of the standardized proof of income such as salary pay slips or Form 16. It is usually tedious for a self-employed individual to compile several years of Income Tax Returns (ITRs), profit-and-loss statements, or bank records which the insurers usually demand for the policy opting process,” says Rakesh Goyal, director, Probus.
Furthermore, self-employed usually undergo income fluctuations which could be another reason for insurers to view them as high-risk applicants, resulting in either higher premiums or policy rejection. Many self-employed people are also unaware of the specific documentation and eligibility criteria which further complicates the policy application process.
What To Do
To assess the financial stability of individuals and business owners when traditional income proofs are unavailable, insurers now rely on various digital metrics. “A key factor is an individual’s creditworthiness, determined through their credit or loan repayment history. Surrogate proofs, such as the Insured Declared Value (IDV) of a vehicle, which indicates its market value, are also considered,” says Garg.
Additionally, insurers may refer to the GST database to evaluate the financial health and operational scale of a business.
However, self-employed individuals still need to get a few things right. To overcome any of such common challenges, self-employed individuals must ensure to maintain clear and organized financial records.
He or she must ensure that the ITRs are consistently filled for at least three years thereby showcasing stable income trends and preparing detailed profit-and-loss statements which can further help to enhance their credibility with the insurers.
Keep In Mind
When purchasing a term insurance plan, self-employed individuals should begin by evaluating their financial needs, including their income, liabilities, and future responsibilities. Opting for a coverage amount equivalent to 10–15 times their annual income ensures their family is financially secure in their absence.
“They should also consider business-related liabilities, such as loans or debts, and future needs like dependents’ living expenses or children’s education,” says Garg.
When opting for a term insurance plan, self-employed individuals must focus on accurate income disclosure to the insurer and appropriate coverage should be selected based on their financial responsibilities.