Term insurance is the best safety net against financial crunches in the absence of the person who is the primary source of income in a family. This tool is especially useful if you are self-employed. The reason is that self-employed individuals are often exposed to high financial risks. As you are your own boss, you do not have the option to fall back on a regular salary or employer provident funds. Thus, in case of any eventuality, your family may lack a financial cushion against monetary hardships. In this case, the payouts from your term insurance can provide economic security to your loved ones.

Why do you need term insurance if you are self-employed?

Unstable revenue

A regular job assures a definite sum credited to your account every month. You can plan your expenses and savings accordingly. However, as an entrepreneur, to stabilize and grow your business, you may often funnel your earnings back into your venture. It might leave behind limited cash for savings and investments. Moreover, there is no surety for the monthly profit amounts. If you are a freelancer, your source of income may not be consistent. Thereby, your earnings might vary from one month to another. Inconsistent revenues can erode savings for meeting day-to-day living expenses, leaving little reserve funds.

Loans and debts

At the nascent stage, your business will need seed capital. You may have to take substantial business or personal loans to build a strong foundation for your company. Even with an established enterprise, you may require finances for procuring raw materials, buying machinery and more. Arranging for such funds may lead to sizeable debts. Moreover, you may use your credit card to buy groceries and medicines, pay school fees, cover electricity bills or rent, etc. If the dues accumulate, the interests levied can make the outstanding credit staggering. In addition to this, if you have a home or a car loan, the equated monthly instalments (EMIs) can be an extra burden if your earnings stop.

Lack of employer-backed benefits

A lot of companies offer benefits to employees, such as life and health insurance. However, self-employed individuals do not have access to these employer-backed benefits.

If you are self-employed, you need to take responsibility for your own financial protection. Buying a limited pay term insurance plan can help provide financial security for your loved ones. These plans offer life cover¹ and may also include optional riders that add extra protection, such as critical illness, accidental death cover, etc.

Risk to family’s financial future

A self-employed business can be unpredictable, especially if you are the sole person managing it. While you may be able to provide financial support to your family now, this income may stop in your absence. You cannot always predict what will happen to your business, but a limited premium payment term plan allows you to leave behind a financial safety net for your loved ones. This money can ensure their needs are taken care of even if you are not around.

How can term insurance help?

To understand the benefits, first, consider how its absence can affect your family members. Life is uncertain, and if a mishap occurs, scarcity of liquid assets can jeopardize your family's lifestyle.

The effect of uneven income and debts on the financial future of your family:

• Covering their living costs can become difficult.
• If you leave an outstanding loan, it can be a challenge to repay it in the absence of a cash reserve.
• The lack of funds can make your children compromise on their higher education plans.
• If you have dependent parents at home, their medical treatments might suffer.
• Your spouse will need money for old age-related expenses.

Without your income, your family will struggle to find sufficient resources to cover their needs. Herein lies the importance of life insurance. In case of an unfortunate outcome, your nominee will receive the sum assured. This will act as a replacement for your income. If the amount is adequate, your family can utilize this sum to cover every necessary expense.

Term insurance is extremely affordable, and you can acquire extensive life cover for a very reasonable premium. Thus, even if your cash flow is uncertain, you can ensure ample funds for your family's well-being.

Key benefits of the limited pay option for self-employed

Below are some benefits of purchasing term insurance with a limited pay option:

Pay during high-income years

If you have a high-income or one time surplus, you can plan your premium payments accordingly. In a limited pay term plan all the premiums can be paid in a shorter, pre-defined duration, such as 5, 7, 10 years and so on. This can help you cover your financial obligations early on.

Coverage without long-term payments

With a limited premium payment term plan, you get long-term coverage even though you pay premiums only for a fixed period. This makes it easier to maintain a long-term policy without having to make continuous payments.

Lower risk of policy lapse

Since you pay the premium for a limited period and complete your payments early, the risk of policy lapse is reduced. Policy lapses often occur due to missed or unpaid premiums. But paying premiums early in life eliminates this possibility and ensures that your coverage continues without interruption.

No premiums after retirement

You can pay your premiums early in life and not have to pay them again later. This removes the burden of making payments during retirement, when your income may be lower and financial responsibilities may change.

Save more on premiums

You can potentially save more on premiums by paying them over a limited period. This can help reduce your overall financial burden and save more in the long run.

What options to look for while buying term insurance to make a complete solution for your needs?

As a self-employed person, you are likely to have some particular financial requirements distinct from salaried individuals. Term insurance plans by reputed insurers can be customized to suit every such need. Here are a few alternatives that you can consider while buying term insurance to maximize its benefits:

A) Select a limited pay option

Life insurance offers multiple premium payment terms:

• Single: You pay the entire premium at the time of purchase.
• Regular: You pay the premium throughout the policy tenure on a monthly or a yearly basis.
• Limited Pay: This option allows you to pay the premium for a limited period, but the life insurance cover continues throughout the policy tenure. The number of years of premium payment is typically lesser than your policy term.

What are the benefits of a limited pay option over other premium payment modes for a self-employed person?

• The shorter premium payment term is especially beneficial for entrepreneurs and self-employed professionals with variable incomes. While your income is on the rise, you can pay off all premiums and enjoy risk protection until an advanced age.
• As a self-employed person, you may continue earning beyond the usual retirement age of salaried people, i.e. 60 years. Thus, a longer risk coverage will be appropriate as an income replacement in your case. In a limited pay plan, the premium payment term is complete within a few years. As a result, you can enjoy an extended coverage even if you lack the surplus income for servicing the policy later in life. Many reputed insurers offer coverage till 85 years with the option to extend it up to the age of 99.
• This plan is useful if doubts about your capacity to pay the premiums to the full policy term are holding you back from buying term insurance. The payments end within a short duration, freeing you from the burden of premiums at an older age.
• The lower the payment term, the lesser is the risk of missing any instalment. The limited pay option thus reduces the chances of a policy lapse, preventing your family from losing the benefits.
• Even though term insurance plans do not have any surrender value with regular premium payment, the limited pay option can be different. If you voluntarily surrender the policy during the policy term, many insurers will pay an unexpired risk premium value.

How can the limited pay option with an annual premium payment mode and regular monthly instalment payout option reduce the premium outgo?

• Life insurers can offer discounts of up to 68% on the total premium when you choose the limited pay option.
• If you are 35 years old now, and pick a policy tenure of 25 years, with a 10 year premium payment term, your payments will be over by the time you become 45 years old. Yet, you will enjoy life coverage until you are 60.
• You can get further discounts if you choose the annual payment mode over the monthly option.

Moreover, if you select the regular income payout option, whereby your nominee receives a monthly income, your premiums will cost less.

B) Take advantage of the Married Women's Property Act (MWPA) option

• What is Married Women's Property Act (1874)?: Under the Married Women's Property Act (MWPA), any life insurance policy that a married man buys to benefit his wife or children becomes protected from the husband's creditors. The benefits of this policy are not considered as a part of the husband's estate.
• How can MWPA help you as a self-employed individual?: As a self-employed person, you may have to avail credit for business expansion or to meet any other monetary shortfall. If such loans remain unresolved in your absence, your creditors may claim the proceeds from your term insurance as repayment of your debts. You can buy your term insurance policy under the MWPA to protect your family from such claims.

C) Add riders to increase coverage

For a nominal cost over your premium, you can protect yourself and your family against different contingencies.

• Critical illness^{^} rider: This option offers payouts on the detection of life-threatening diseases that often require long-term, expensive treatments. As a self-employed person, you may not have regular wages to fund your medical costs. Also, if ill health compels you to give up your profession, you will not have the support of pensions. In this scenario, the proceeds from this rider can help you pay for adequate healthcare.
• Accidental death benefit: Look for a policy that allows the addition of this rider either at the time of purchase or later. Since accidents can strike any time, it may leave you unprepared to provide for your family's financial needs. This rider benefit will provide extra funds to your family in case you meet with an accident.

Final words

Term insurance is the perfect solution for self-employed individuals looking to shield their families from undesirable economic situations. If you are an entrepreneur or a freelancer carving out your success journey independently, consider buying a term plan. It will safeguard your family's living standards against several adversities.

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