Self-Employed? Here’s How To Choose The Best Term Insurance Plan

For self-employed individuals, choosing the right term insurance plan is extremely important. Affordability as well as flexibility play a crucial role given the fluctuating nature of their income. 

“Individuals need to consider flexible premium payment options that also offer comprehensive coverage.  A plan with some flexible premium payment options and coverage terms is especially valuable for this group. The plan should provide adaptations to either a premium payment schedule or the premium rate if they experience a financial situation where money may be tight,” says Aditya Mall, appointed actuary, Future Generali India Life Insurance. 

Choosing The Right Coverage 

As a thumb rule, adequate term insurance coverage should aim for a sum assured that's 15 to 20 times the policyholder’s annual income.  “Key factors to be considered are family expenses, mortgage/debts, and future goals, as they play a vital role in determining the right amount. Also, it is critical to estimate the future adjusted value of family expenses based on inflation,” says Varun Agarwal, head of term insurance, Policybazaar.

While a rule of thumb is good to go, since self-employed people do not have a regular paycheck, they should work on a customized plan to figure out how much term insurance they should opt for. “First, figure out your current and future financial obligations — namely, your household expenses, any existing business debt, your children’s education aspirations, and future retirement savings,” says Mall. 

It’s also smart to consider your lifestyle. Many are shifting to “dynamic” insurance plans that offer scalable coverage depending on business expansion or evolving life needs.

Documents Requirement 

The introduction of tailored term plans for the self-employed has eliminated the need for traditional income documentation, such as ITRs or salary slips. ‘Insurers now use other parameters to determine risk, such as the creditworthiness and loan history of the self-employed, surrogate proofs like the Insured Declared Value (IDV) of a four-wheeler vehicle owned by the individual, moreover, it is also possible to access GST databases and Income Tax Returns of the applicant to ascertain the value of their business,” says Agarwal. 

However, unlike salaried individuals, you may still have to provide income verification documentation such as bank statements or profit and loss statements. “This may result in some additional underwriting or even a higher premium, depending on the risk the insurer has determined,” says Mall.