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Term Life Insurance for Self-Employed / Freelancers in India
In an era of rising entrepreneurship and self-employment, financial security is critical. Self-employed people do not have the benefit of employer-provided insurance or pension plans, so it is critical that they create their own financial backup.
A term insurance plan ensures that their dependents will not face unexpected financial difficulties. It also benefits those with outstanding loans, business obligations, or significant financial responsibilities by providing a safety net for themselves and their families.
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Insights Into Term Insurance Plan for Self-Employed
Here is an overview of a term insurance plan for self-employed individuals:
What is Term Insurance for Self-Employed?
Term insurance is a simple and affordable life insurance policy that provides financial coverage to the policyholder’s family in case of their untimely death. For self-employed individuals, term insurance acts as a safety net, offering financial stability to dependents.
Unlike salaried individuals who may have company-provided insurance, self-employed people usually need to secure their own protection. If the policyholder passes away during the policy term, this policy can help their family meet financial needs like mortgage payments, daily expenses, or children’s education, providing death benefits.
Why Self-Employed Individuals Need Term Insurance?
Self-employed individuals have unique financial challenges that make term insurance particularly important. Here are several reasons why they need it:
Financial Security for Dependents
Many self-employed individuals are the primary earners in their families. In the event of an untimely death, term insurance ensures that loved ones receive financial support, helping them maintain their lifestyle and cover essential expenses.
Debt Protection
Starting or growing a business often involves taking on debt. A term insurance policy can provide funds to cover outstanding loans, relieving family members from financial burdens during a difficult time.
No Employer Benefits
Unlike salaried employees, self-employed workers don't typically receive employer-sponsored benefits, such as life insurance. Term insurance fills this gap, providing much-needed financial protection.
Cost-Effectiveness
Term insurance is generally more affordable than whole life policies, making it a sensible choice for self-employed individuals who need to manage their expenses and cash flow carefully.
Flexibility in Coverage
Term insurance policies can be tailored to specific needs, including different coverage amounts and terms, allowing self-employed individuals to choose a plan that fits their financial situation.
How Does Term Insurance for Self-Employed Work?
Term insurance for self-employed individuals works similarly to term insurance for salaried employees but with some considerations specific to the nature of self-employment. Here’s a breakdown of how it works:
Understanding Term Insurance for Self-Employed Scenarios with Illustration
Consider the scenario of a 25-year-old entrepreneur named Aryan. He is a self-employed individual who has established a startup and is now earning an annual income of 10 lakhs. To safeguard the future of his loved ones, he purchased term insurance of 1 crore for a term of 25 years.
Aryan considered various factors such as the inflation rate, future financial goals, and the potential financial liabilities that might fall on his family in his absence. This amount would ensure that his family could maintain their lifestyle and meet future financial goals.
Rajesh also opted for a premium waiver rider, which meant that if he became disabled and couldn't work, the premiums would be waived, and the policy would remain active.
Scenario 1: Death During the Policy Term
Rajesh met with a severe accident. Despite the best medical care, he couldn't survive. Priya his wife who is a nominee received ₹1 crore death benefit. This financial support allowed her to pay off the mortgage, cover daily expenses, and secure their children’s education.Scenario 2: Outliving the Policy Term
If Rajesh remains healthy and safe throughout the policy term, he would not receive any payout when the 25-year term ends, as the term plan typically does not provide maturity benefits.Features and Benefits of Term Insurance for Self-Employed
Term insurance for self-employed individuals offers several important features and benefits:
Affordability
Term insurance typically has lower premiums compared to whole life insurance, making it a budget-friendly option for self-employed individuals.
Flexibility
Policies can be tailored to meet specific needs, allowing you to choose the coverage amount and term length that fits your financial situation.
Financial Security for Dependents
In the event of the policyholder's death, the beneficiary receives a lump sum payout, providing financial support for loved ones, especially important for self-employed individuals who may not have a pension or retirement plan.
Tax Benefits
Premiums paid on term insurance policies may qualify for income tax deductions under applicable tax laws, providing additional financial advantages.
No Cash Value
Unlike whole life policies, term insurance does not accumulate cash value, meaning all premiums go towards coverage, which can be beneficial for those looking for straightforward protection without the investment component.
Renewability and Convertibility Options
Many term policies offer the option to renew after the term ends or convert to permanent insurance, providing flexibility as circumstances change.
Easy Online Purchase
Many insurers offer the option to apply for term insurance online, making it accessible and convenient for busy professionals.
Additional Riders
Options for customization through riders, like critical illness or accidental death benefits, allow self-employed individuals to enhance their coverage according to their specific needs.
Types of Term Insurance Plans for Self-Employed Individuals
1. Level Term Insurance
Level Term Insurance Plan offers a fixed death benefit for the entire term of the policy. This plan is suitable for those looking for straightforward coverage without fluctuations in premium or benefit.2. Decreasing Term Insurance
The death benefit decreases over time, often in line with a mortgage or other loans. This can be a cost-effective option for self-employed individuals with declining financial obligations.3. Convertible Term Insurance
Convertible Term Insurance Plan allows policyholders the option to convert their term policy into a permanent life insurance policy without undergoing further medical underwriting. This flexibility can be valuable as financial needs change.4. Return of Premium Term Insurance
Return of Premium Term Insurance Plan offers a unique feature where if the policyholder outlives the term, they receive back all the premiums paid. Although the premiums are generally higher, it provides a safety net for those who want coverage with a potential refund.5. Renewable Term Insurance
This type of policy allows you to extend your coverage when the term ends without needing a medical exam. It’s useful for self-employed individuals whose financial or health situations might change over time.6. Group Term Insurance
Self-employed individuals who are part of a trade or professional association can often get group term insurance plan at a lower premium. This is a cost-effective option for those eligible.7. Increasing Term Insurance
With this policy, the death benefit increases over time. It’s ideal for self-employed people who want to account for inflation or future financial commitments like loan EMIs.How to Choose the Right Term Insurance as a Self-Employed Person
1. Identify Your Coverage Needs
Understanding your coverage needs is the first step in selecting the right term insurance:
- List all your existing debts, such as personal loans, credit card debt, and mortgages. This will help you determine how much coverage you need to ensure your family can settle these debts without financial strain.
- Evaluate how much income your dependents would require to maintain their current lifestyle in your absence. A common recommendation is to have coverage that is 10-15 times your annual income.
- Think about life events that might require funding, such as your children's education or marriage. Factor in inflation to ensure that your coverage remains sufficient over time.
2. Consider Premium Affordability
Finding a balance between adequate coverage and affordable premiums is essential:
- Analyze your monthly income and expenses to determine how much you can realistically afford to pay in premiums without compromising your standard of living.
- Use online term insurance calculator to request quotes. This will allow you to see various premium structures and coverage options.
- Some insurers allow you to pay premiums annually, half-yearly, or monthly. Annual payments may save you money in the long run, while monthly payments help with budgeting.
3. Evaluate Policy Features
When comparing policies, consider the following features carefully:
- Choose a term that aligns with your financial needs. Common terms are 10, 20, or 30 years. Ensure it covers the duration until your dependents no longer require financial support.
- This is the amount that will be paid to your beneficiaries upon your death. Make sure it reflects your needs and obligations.
- Some policies allow you to renew coverage at the end of the term without needing to undergo a medical examination. Confirm these details as your health conditions may change over time.
- Research the insurer’s claim settlement ratio, which indicates the percentage of claims they successfully settle compared to the total claims made. A higher ratio signifies a more reliable company.
4. Add Riders for Additional Protection
Riders help customize your policy to fit your unique situation:
- Accidental Death Benefit: If you pass away due to an accident, this rider provides an additional payout. This can be essential for those in high-risk professions.
- Critical Illness Rider: This rider offers a lump sum payout if you are diagnosed with specific serious illnesses, such as cancer or heart disease, which can help cover medical expenses or lost income.
- Waiver of Premium: If you become completely and permanently disabled, this rider waives your premiums, ensuring your policy remains active without a financial burden.
Eligibility Criteria for Buying Term Plan for Self-Employed Individuals
For self-employed individuals, the eligibility criteria for term insurance can vary slightly between insurers, but generally include the following:
Documents Required for Term Plan for Self-Employed Individuals
Here is the list of documents required for self-employed individuals applying for term insurance:
Note: Depending on the insurer's requirements, each section requires one or two documents as proof for purchasing term insurnace.
Steps to Buy Term Insurance for Self Employed Individuals
Step 1
Determine the coverage amount based on your financial responsibilities and future goals.
Step 2
Look at different insurance providers and plans. Compare features, benefits, and premiums.
Step 3
Gather necessary documents like proof of identity, address, and income proof.
Step 4
Fill out the application form and complete any required medical examinations.
Step 5
Review the policy terms, pay the premium, and receive your policy document.
Tax Benefits of Term Insurance for Self-Employed Individuals
Self-employed individuals often navigate a complex financial landscape, and securing a term insurance policy can offer not just protection but also valuable tax benefits. Here are some key points to consider:
Premium Deductions
Self-employed individuals can take advantage of premium deductions for term insurance under Section 80C of the Income Tax Act. This provision allows them to claim deductions on premiums paid, thereby reducing their taxable income. The maximum limit for these deductions is ₹1.5 lakh per financial year, making it a valuable option for managing tax liabilities.
Death Benefit
Another significant benefit arises from the death benefit associated with term insurance. Under Section 10(10D) of the Income Tax Act, any death benefit received by the nominee is tax-exempt. This means that the financial support provided to dependents in the event of the policyholder's demise comes without any added tax burdens, ensuring that the funds are fully available for their needs.
Health Riders
If your term insurance policy includes health riders like critical illness or accidental death benefits, the premiums paid for these riders can also be claimed under Section 80D, up to a limit of ₹25,000 (₹50,000 for senior citizens).
Business Expenses
If the term insurance policy is taken for business purposes, such as keyman insurance, the premiums can potentially be claimed as business expenses. This classification may provide additional tax benefits, allowing self-employed individuals to reduce their business income for tax purposes, thus lowering their overall tax liability.
How to File a Claim?
Documents Required for Claiming Term Insurance
The documents required for claiming term insurance might vary across insurers. However, typically, the following documents are required:
Common Mistakes Self-Employed Individuals Should Avoid
When self-employed individuals take out term insurance, there are several common mistakes they should avoid to ensure they get the best coverage for their needs:
Underestimating Coverage Needs
Many self-employed individuals fail to calculate their actual coverage needs. It’s essential to consider outstanding debts, future expenses, and income replacement needs.
Choosing Low Coverage for Cost Savings
While it can be tempting to opt for the cheapest policy, selecting a low coverage amount can leave you vulnerable. Ensure the coverage adequately protects your family's financial future.
Ignoring Premium Payment Frequency
Some policies offer discounts for annual payments. Evaluating different payment options may save money in the long run.
Not Reviewing Policies Regularly
Life changes, such as marriage, having children, or starting a new business, can impact insurance needs. Regularly reviewing your policy ensures it remains aligned with your current situation.
Overlooking Additional Riders
Many ignore optional riders that can enhance their policy, like critical illness or accidental death benefit riders. These can provide extra financial security.
Failing to Disclose Information
Providing incomplete or inaccurate information during the application process can lead to claim rejections later. Always be honest about your health, lifestyle, and business activities.
Neglecting to Compare Policies
Failing to shop around and compare different insurers can result in missed opportunities for better coverage or lower premiums.
Rushing the Decision
Impatience can lead to poor choices. Take your time to research and understand the policy terms and conditions before making a decision.
Setting Irrelevant Exclusions
Some may overlook potential exclusions in their policy. Understanding what is covered and what isn’t is crucial to avoid surprises when filing a claim.
Not Considering Financial Stability of the Insurer
It’s vital to choose a financially stable insurance company. Check ratings and customer reviews to ensure they have a good track record for claim settlements.
FAQs about Term Insurance for Self-Employed Individuals
Can self-employed individuals get term insurance?
What is the minimum income requirement for self-employed term insurance?
Can NRIs buy term insurance in India?
Do self-employed individuals get tax benefits?
How do I apply for term insurance as a freelancer or business owner?
What happens if I miss a premium payment?
Is ITR mandatory for term insurance?
Can a business person take self-employed term insurance?
Can a non-salaried person take self-employed term insurance?
Other Important Articles Related to Term Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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