Irrespective of whether you are salaried or self-employed, term insurance is a must for all. The primary purpose of term insurance is to provide a financial security blanket to the family in the unfortunate event of the breadwinner’s death.
For salaried individuals, assessing income is straightforward. We can review salary slips and tax returns to get an accurate picture of their earnings, making it easier to determine suitable coverage. However, with self-employed individuals income may or may not be continued and harder to verify. In this scenario, underwriting becomes more meticulous.
How Much Life Insurance Do You Need
As a self-employed person, determining how much insurance to take can be tricky, especially with fluctuating business earnings. Typically, there are two approaches to this:
“One common guideline as mentioned earlier suggests having life insurance coverage of 10 to 15 times of one’s annual income. This rule is based on two perspectives. The first is to consider the need to replace your income for the next 20-30 years. If something were to happen to you, that income must be compensated,” says Madhu Burugupalli, senior EVP, head of products, Bajaj Allianz Life Insurance.
The second approach looks at future expenses. Consider your family’s monthly living costs—such as school fees, home loans, and other necessities—and work backwards to determine how much coverage you would need to sustain those expenses.
While your income may fluctuate, your liabilities and lifestyle tend to remain more stable. Therefore, you can either calculate the coverage needed based on your potential future income or assess your future expenses to find the right amount.
For a simpler method, you might consider taking the average of your income over the past three years and then applying the 10 to 15 times multiplier based on that average.
Ultimately, while determining the exact amount of coverage isn’t a precise science, the key is to start somewhere.
Consider Riders
“Think about whether you want to add any riders to your policy. For a nominal cost, you can enhance your coverage with additional protections, such as accident or critical illness coverage. This can provide a more comprehensive safety net,” says Burugupalli.
Consider Flexible Payment Options
If something were to happen to you, your family would receive a large sum of money or a significant lump sum. Consider whether they would be able to manage that amount effectively. Not everyone is comfortable handling large sums of money, and there’s a risk it could be spent quickly on immediate expenses.
To address this, some insurance companies offer flexible payout options. You can choose to receive your benefit as a lump sum, or as a combination of a lump sum and ongoing income. “For example, if you have a coverage amount of two crores, you might opt for one crore as an immediate payout and five lakh rupees annually for the next 20 years. This way, you can cover immediate liabilities while also providing a steady income for your family,” says Burugupalli.
While these options add some complexity, they can be tailored to your specific needs and those of your beneficiaries. However, if you prefer simplicity, taking a full lump sum is perfectly fine too.
