A prudent guideline for self-employed individuals is to target at least 10 to 15 times their actual annual income when determining life insurance coverage.
With life insurers altering their income assessment criteria for the self-employed, more people from this category are opting for term policies (which are pure insurance covers).
Online insurance platform Policybazaar.com witnessed a 10 per cent jump in the issuance of term insurance policies to self-employed individuals between Q2 FY22 and Q2 FY23.
Hurdles for the self-employed
Self-employed individuals often encounter hurdles in obtaining term insurance due to the absence of standardised income proof.
"The lack of consistent documentation, unlike in the case of their salaried counterparts, can result in difficulties in proving their income," says Vaibhav Kumar, head-products, Max Life Insurance.
"This, in turn, leads to inadequate coverage or, in some cases, a complete lack of coverage," Kumar adds.
Since the self-employed are not able to offer a salary slip, they are offered term insurance based on the income-tax return (ITR) filed by them (and the Computation of Income document).
Says Srinidhi Shama Rao, chief strategy officer, Aegon Life Insurance: "However, in many cases this is missing as well. As a result, they face a high rate of rejection from insurance companies, which in turn deters them from trying to get term insurance."
There are other hurdles.
"The income eligibility for self-employed individuals is higher than for salaried individuals.
"The minimum annual income required for salaried people, for instance, is Rs 3 lakh whereas for the self-employed it is Rs 5 lakh," says Naval Goel, CEO, PolicyX.
"Apart from this, salaried individuals usually get a 5 per cent discount on their first-year premium, which the self-employed do not," Goel adds.
Low awareness is another issue.
"Many are not aware of term insurance and why they should buy it, especially when it does not make a payout if the policy holder is alive at the end of tenure," says Rao.
The availability of the right products for the self-employed is another issue.
The insurance sector has traditionally focused on people living in the metros and Tier-I cities and on the salaried class.
Experts say that when addressing this segment, there is a need to have a lower ticket size, high volume paradigm.
Most self-employed tend to be first-time buyers of insurance.
"There is a need to create byte sized products that a customer finds affordable and hence is more easily able to make a purchase decision," says Rao.
Insurers are pivoting
Insurance companies have now realised that the biggest growth will come from the self-employed.
"They have realised the high contribution the self-employed make to the economy, which will only increase with time," says Rhishabh Garg, head-term insurance, Policybazaar.
Hence, they are now pivoting towards putting in place authentication processes suited to the self-employed.
Life insurers are now trying to make use of alternative data sources through which they can estimate a person's income even in the absence of a salary slip or ITR.
They are increasingly relying on investment and consumption data to estimate income.
"Insurers are attempting to analyse data such as vehicle ownership or GST databases to gain insights into the volume of business generated by self-employed individuals," says Kumar.
Many self-employed individuals use credit cards. Insurers take their consent and then check their credit history with the credit bureaus. This provides them with a lot of information about a person's financial status.
"While a credit card does not tell us a person's income, the amount of spending a person does through his credit card enables insurers to estimate his overall earnings with a good amount of confidence," says Rao.
The government has now enabled account aggregator. If the client provides OTP-based consent, insurers look up the credit and debit from a person's bank accounts. Then they use algorithms to estimate that person's income.
"Account aggregator has acted as a force multiplier for providing insurance to the self-employed," says Rao.
Insurers are also turning to investment-related data.
"Insurers are also making use of data related to mutual fund investments, house ownership, the amount of housing loan taken, and the EMI paid on the loan to arrive at an estimate of income," says Garg.
Sum insured
The basic purpose of term insurance is that the family should not suffer financial hardship if the breadwinner passes away.
Most people have goals like children's education and marriage, repayment of home loan, saving for retirement, and so on. The sum assured should be adequate to fulfil these goals.
"A prudent guideline for self-employed individuals is to target at least 10 to 15 times their actual annual income when determining life insurance coverage," says Kumar.
For a more detailed calculation, individuals should also take into account their assets and liabilities. They may make use of the services of a financial advisor or rely on an online calculator.
The right tenure
Most salaried persons work till 58 or 60, so they buy coverage till that age. After that, since they don't have an income, they don't require insurance. The self-employed may continue to work even after 60.
There are two ways to answer the question regarding tenure. One, estimate the age till which you are likely to work and have an active income. If someone within the family is dependent on that income, you need term insurance.
The other way is to think in terms of obligations.
"You should have a term cover for around 30 years from the birth of your youngest child. Your children are likely to be settled by then and your savings should suffice to take care of your spouse's retirement," says Garg.
Some people are keen to pass on wealth to their nominees. They may take term insurance for an extended period.
Term insurance comes into play when you are not around. "Make sure your nominee is aware of the term cover you have bought," says Garg.
While the usage of alternative data is increasing, it is still advisable for the self-employed to file their ITR as it boosts their chances of getting this vital cover.
"The ITR should be based on actual income and it should transparently show the increase in income that happens over the years," says Goel.
Make complete and transparent disclosure of any medical condition you have. "This will help your family members avoid hassles at the time of claim," says Garg.
The premium rate should not be your primary consideration when choosing a policy.
"Conduct a holistic evaluation of insurance plans, taking into account aspects such as claim settlement ratio, policy flexibility, and additional benefits," says Kumar.
Having bought the policy, the self-employed sometimes stop paying the premium whenever they witness turbulence in their income.
"Avoid allowing your policy to lapse as reinstating it can at times be a long-drawn procedure," says Rao.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Ashish Narsale/Rediff.com
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