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Why Term Insurance is crucial if you are Self Employed?

ET CONTRIBUTORS|
Updated: Oct 29, 2019, 02.21 PM IST
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Being your own boss is often touted as the biggest benefit of being self-employed. However self-employment has challenges too, many financial in nature. The constant look-out for capital to expand the business and loans, for one. The uncertainty of a fallback option for the family in case of a medical emergency or even sudden demise leaving the family with debt and no steady income or financial reserves are crippling thoughts which is why self-employment is not for the faint hearted.

However, an increasing number of entrepreneurs and self-employed professionals like chartered accountants, lawyers, doctors and freelance technology consultants among others are now realising the financial relief that a term insurance with an adequate sum assured can provide. Term insurance essentially covers financial risks arising in case of the unfortunate demise of the policyholder. Insurance companies offer up to 20 times of annual income as sum assured on term insurance policies. For people having dependents and responsibilities, the fact that a term insurance can be bought under the MWP Act brings a sense of relief. What makes a term insurance more attractive is the easy process to buy it online, that too at extremely low prices.

While a term insurance policy itself is beneficial to all individuals, it can be even more valuable for self-employed individuals. Let us understand in detail the reasons why term insurance cover is strongly advised for the self-employed.

Term insurance is recommended for self-employed with financial dependents irrespective of their martial or parenthood status. Uncertainties can derail your successful business and could put even parents in trouble.

highlights

No employer-provided Life Insurance
Many salaried professionals receive a life insurance cover from the organisation or employer. Self-employed professionals miss out on this. Term insurance will protect the family against the financial risk of losing the self-employed individual. The insurance payout could be used by the beneficiaries towards any expense such as household expenses, repayment of a home loan or higher education fee of children or repayment of the loans taken by the business. After all, loans of the self-employed individual will need to be repaid either by the business or legal heirs, in their absence too.

Low premiums
A term insurance is a pure risk cover. This means that the policy is not used to invest money and earn returns. However, in case of death of the policyholder, the beneficiary gets a huge payout with respect to the premium. For instance, for a 30 year old non-smoker in Mumbai, the annual premium for a sum assured of Rs 1 crore can be as low as Rs 8,000. Which would mean that in case of the policyholder’s death, the beneficiaries of the policy would get a payout of Rs 1 crore, that too tax-free. This makes the annual premium less than 0.1% of the sum assured.

This premium is largely based on your age and health conditions. The early you buy a term insurance, the lower will be your premium. Moreover, this premium remains constant throughout the policy term. While a 30 year old non-smoker could get a term insurance of Rs 1 crore for about Rs 8,000, a 45 year old non-smoker buying the same policy would have to pay upwards of Rs 17,000 for the same benefit. Insurance companies also take in to account other factors like habits like smoking, health issues or nature of employment. A 45 year old smoker would pay a premium of Rs 26,000 and above compared to Rs 17,000 and above for a non-smoker of the same age.

Protection under MWP Act
The Married Women’s Property Act, 1874 (MWP Act) intends to safeguard a married woman’s property from creditors and family members. If you are married and self-employed, a term insurance under the MWP Act is a perfect risk cover for your family as it adds one more layer of financial security for your family. If you happen to have unpaid loans, under a regular term insurance, the proceeds from the insurance payout can be claimed by creditors to the policyholder. However, in a term insurance bought under MWP Act, the creditors cannot make such a claim, hence avoiding any financial setback and pressure to the surviving spouse.

Avoid financial disruption due to critical illness
The rising incidence of critical illnesses like cancer or heart diseases and the rising cost of treatment is a cause of concern for all of us. As a self-employed individual, this could put your savings on the line in case of a critical illness. Additional benefits through critical illness riders can be helpful in such a situation. A waiver of premium in case a critical illness is diagnosed for the policy-holder can be an added benefit. This rider also kicks in if the policyholder suffers from a permanent disability. In such a situation, all future premiums of the policyholder are waived-off while the benefits remain intact. This could also help take care of the treatment cost.

Critical illness payout benefits the family
If the self-employed professional were to suffer from a critical illness and eventually succumb to it, the family would be in serious financial duress due to cost of treatment for such illnesses. In such a situation, the claim amount from term insurance can provide financial relief to the family battling with loss of the family member, mounting hospital bills and financial insecurity from the loss of the chief earner of the family.

Simpler documentation
Self-employed individuals often face difficulties securing finance or loans due to irregular cash flow of their enterprise as compared to their salaried friends with a secure monthly pay. Some insurance companies have taken steps to ease the path for self-employed professionals. For instance, while a salaried individual needs to submit the Income Tax Return as a proof of income, self-employed professionals are exempt from that requirement. The amount of term insurance cover varies across insurance providers and is based on the nature of work of the self-employed professional.

Easier premium payment options
Compared to others, life insurance companies provide you with flexible options for premium payment. While salaried individuals prefer monthly or quarterly premium payments throughout the policy term, you can choose to pay the premium only for the initial few years and be done away with it. There are also variants of term insurance where you can choose to pay just one premium at the beginning of the policy term. This covers you against the possibility of being low on the surplus in the future that could impact your life insurance policy.

Tax benefits over Rs 45,000 annually
Term insurance not just helps create a risk cover for the policy holders’ family, it also offers tax benefits to the policyholder. The amount paid as the premium for term insurance can be claimed as a deduction under section 80C of the Income Tax Act, up to Rs 1.5 lakh can be claimed under this provision. For a person in the 30% tax slab, this deduction can result in financial savings of over Rs 45,000 in a single year.

While it is true that term insurance is a must-have product, especially for those having financial dependents, the discussion often gets restricted to those getting married or becoming parents. Term insurance is equally important for self-employed individuals, irrespective of their marital or parenthood status. This is because uncertainties can overturn your successful professional practice or small business and could put your near and dear ones in trouble. Online availability of term insurance makes it even more accessible now. With the ease with which you can get term insurance these days, despite being self-employed, you must make sure that you safeguard a financial-stress-free future for your loved ones.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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