Is Life Insurance Available for the Self‑Employed?

The short answer would be, ‘yes you can.’ The question should also be about, whether you should buy a life insurance policy and if yes, then why. We need to have a regular income stream for basic survival necessities. It doesn’t matter if you are employed or not. Your monthly income may come from your business, rentals or anything other work that you do. However, with evolving time, life insurance providers have changed the way they work keeping in mind the changing needs and situations.

For example, a mother looking after the household and children is an inseparable part of the family. Even though she’s is not formally employed by definition and does not have a direct income, her contribution to the family and children’s growth is phenomenal.

Should we not consider life insurance for her? Is it possible for homemakers to get a life insurance policy? Let us find out.

How Life Insurance Eligibility is decided?

Life insurance eligibility is based on the human life value of a person. Human life value (HLV) indicates the possible financial value this person will add to the family. Presence of a formal income makes it easier for the life insurers to estimate your HLV. However, with changing income and life scenarios, the principle of HLV has opened up to include the value of work and wealth as well.

For example, if you are employed and have an income of Rs. 10 lakhs per annum, your maximum life cover eligibility is Rs. 1.5 crores. If you do not have an income, such as in the case of a homemaker, HLV is your replacement cost to the family.

Similarly, if you have income from other sources like interest and investment income, you can estimate your HLV based on that.

Why Invest in Life Insurance if you’re Self-employed?

You can use life insurance plans to not only safeguard your family’s future financially against contingencies but also for investments. Apart from term life insurance, which is a pure protection plan, all the other life insurance plans can help you meet different financial goals.

Life insurance plans are unique because of the protection they offer along with the investment. The simultaneous life cover makes these plans fail-proof investments for your goals, especially if they are for your family.

For example, the child’s higher education and marriage goals. Both goals are important milestones in your child’s life. With life insurance plans as investment options, you can ensure that your child can meet these goals even if you are no longer there.

So, life insurance can serve two purposes:

• Financial safety from unforeseen events
  
• Long-term investment for important financial goals

You do not need to have employment or direct income to invest in life insurance plans. You can buy a life insurance plan if you are self-employed. You must have a source of income so that you can pay the premiums of your insurance plan.

Which Life Insurance Plans to Invest in & When?

Based on your financial goals you can invest in the following three types of life insurance plans:

• Guaranteed Savings Plans
  
  
• Unit Linked Insurance Plans (ULIPs)
  
  
• Annuity Plans (deferred annuity & immediate annuity)

Guaranteed Savings Plan

Guaranteed saving plans, as the name suggests are the safest long-term investment option from life insurance. You can determine the maturity value of a guaranteed investment plan in the beginning before starting the investment.

Since these plans are one of the safest investments, you can use these plans to fulfil goals where you cannot compromise on the goal’s value. For example, the marriage goal of your child.

Marriage goal is one of those financial goals where you should spend only out of your pocket, and avoid overshooting your budget. But, at the same time, you also do not want to compromise on the celebrations.

Thus, a guaranteed savings plan where you can set the maturity goal beforehand is the best option to achieve this goal.

Unit Linked Insurance Plans (ULIPs)

Unit linked insurance plans are the most versatile investment plans from life insurance companies. Few unique aspects of ULIP investments:

• Invest in multiple asset classes: equity, debt and liquid funds in any ratio
  
• Switch between asset classes manually or using automated portfolio management options
  
  
• Enjoy all the tax benefits available to any life insurance plan despite switching between assets

Because of these features, ULIPs are the best long-term wealth-building investments. You can automate your investment and portfolio management in a ULIP plan and let your money grow for the investment period.

You can also use ULIPs as a pension plan using the systematic withdrawal option in the plan. Systematic withdrawal option in ULIP allows you to withdraw the accumulated corpus in the plan as a monthly income.

The best part about this setup is that the income is not taxable coming from a life insurance plan.

Annuity Plans

Life insurers offer two types of annuity plans - deferred annuity and immediate annuity plans. Another name for these plans is pension plans since the primary purpose of these investment plans is to offer a monthly pension.

If you are contributing to retirement solutions like National Pension Scheme (NPS) or Employee Provident Fund (EPF) you will need to invest a part of your corpus into one of the annuity plans.

Annuity plans provide a way to create safe and reliable long-term pension out of your retirement corpus. If you are investing at the time of retirement and want to start your pension immediately, immediate annuity option is for you.

However, if you want to invest now and start pension later, you can go for the deferred annuity option.

Also, unlike ULIPs monthly income from a pension plan is taxable as salary income. Thus, including ULIP investment to your retirement portfolio early on will help you reduce your tax burden post-retirement.

You can also invest in annuity plans without formal employment. All you need is a large enough corpus and a goal in mind about how to use it for your future.

What Documents are Required to Buy a Life Insurance Plan for Self-employed Professionals?

You will be required to submit a few essential documents while buying a life insurance policy. Ensure that you share accurate information and documents with the insurance provider to avoid rejection of policy.

Here’s the list of documents that you must keep handy (any one):

• Latest 2 years Income Tax Returns. Make sure that the returns are not filed in the same year along with computation of income.
  
• If computation of income statement is not available, you should have last 3 years income tax returns. Ensure that the returns are not filed in the same year.
  
• CA certified audited balance sheet and profit loss account of last 2 years.
  
• Form 26AS – it provides details of TDS or TCS from various sources of income of a taxpayer.

Life insurance providers have started considering alternative documents to help self-employed people buy a life insurance cover they need. Self-employed professionals can now increase their cover eligibility, which will be considered:

Based on Calculation of your Annual Income

• As a multiple of the Ex-showroom price of your car
  
• As a multiple of the amount that you invest monthly in mutual funds
  
• As a multiple of your credit card limit
  
• As a multiple of the monthly EMI on your home loan

Based on Calculation of Assets Owned

• Sum assured eligibility amounting to 50 percent of the house/shop owned by you that has a maximum value of Rs.2 Crore.
  
• Sum assured amounting to 1.5 times the mutual fund, fixed deposit, portfolio statements held by you.

Running a business has its own challenges. We may end up procrastinating about the responsibilities that we have for our loved ones. Get a backseat and focus on your business and secure your family with the best life insurance plan. It is designed for everyone – whether you are a salaried professional or you are self-employed – a life insurance plan acts as a cushion for your family members in case of an unforeseen event.