If you are self-employed, planning for the future tends to be complex. You manage your work, income, and savings without the structured benefits extended to the salaried professionals, such as company-provided insurance. That’s why a term insurance plan is important. A key challenge, however, is understanding how to calculate term insurance premium in the absence of a fixed income or payslips.
Here are practical tips about how term insurance premiums are structured for self-employed individuals. Whether you own a small business, are a consultant, or are a freelancer, this information is applicable and practical.
Why Term Insurance is Important for Self-Employed Individuals
Term insurance for self employed is necessary as it provides monetary assistance to your nominee if you pass away. Being self-employed, you may not be covered under group insurance schemes, and therefore, individual cover becomes all the more important.
This guarantees that the beneficiary gets a lump sum payment, referred to as the sum assured, when you are not around. It also serves as a substitute for lost wages and helps pay off debts, children’s education, and livelihood expenses. The right policy is a decision based on what you need and what premium you can pay easily.
Factors That Affect Term Insurance Premiums
Before using any tool or calculator, it’s helpful to know what influences the premium you pay.
1. Age
The younger you are, the higher the chances of getting an insurance policy with better terms and relatively lower premiums. This is because younger people are considered lower risk by insurers.
2. Cover Amount (Sum Assured)
This is the amount your family would receive. A higher cover means a higher premium. A good rule is to choose a cover that is 10–15 times your annual income.
3. Policy Term
This is the length of time you’re covered under the policy. Longer policy terms increase the premium but provide protection for more years.
4. Health Condition
Your medical history and current health play a role. If you have pre-existing conditions, your premium may be higher.
5. Lifestyle Habits
Your lifestyle choices can have a direct impact on their health, which in turn can influence the premium rates applied. If you are a regular smoker or drinker, the insurers might charge you an increased premium.
6. Additional Benefits (Riders)
You can include additional features, for example, critical illness cover or accidental death benefit. These cost a bit more but provide additional protection.
Documentation Challenges for the Self-Employed
Salaried employees lack payslips and salary certificates, while the self-employed may also lack these documents. This complicates documentation, but not necessarily without a solution.
Here’s what insurers will typically accept:
- Income Tax Returns (ITR) for the past 2–3 years
- Proof of business registration
- CA-certified income statements
- GST returns or profit & loss statements
A few insurers also take bank statements to gauge your cash flow. This assists in assessing your paying capacity for the premium as well as deciding on the appropriate sum assured.
Tools to Help Calculate Term Insurance Premium
Knowing how to calculate term insurance premium is easier when you use the right tools. You don’t need to be an expert—just have basic details ready like your age, desired cover, and policy term.
1. Online Premium Calculators
Online Premium Calculators require you to provide basic personal details such as your full name, date of birth, residency status, mobile number, and annual income.
All insurance providers and financial websites have calculators where you input easy information like:
- Age
- Gender
- Tobacco use
- Policy duration
- Sum assured
The calculator provides you with an estimated premium in seconds. Some even provide options to select monthly, quarterly, or annual payment options.
2. Human Life Value (HLV) Calculator
This tool helps decide how much insurance you need based on future income loss. It’s especially helpful for self-employed people whose income may change every year.
HLV = Average Annual Income × Years Left Until Retirement
This gives you a better idea of the cover needed, helping you avoid being over- or under-insured.
Simple Steps to Select the Right Premium
You don’t need a financial background to choose the right plan. Just follow these easy steps:
| Step | What to Do |
| Step 1 | Record your average income over the last 2–3 years |
| Step 2 | Choose a sum assured (10–15 times your average annual income) |
| Step 3 | Select a policy term up to retirement (usually 60–65 years) |
| Step 4 | Calculate using a calculator to see the estimated premium |
| Step 5 | Take riders such as critical illness cover, if desired |
| Step 6 | Ensure the premium is affordable for you |
For example, if a 38-year-old freelance architect evaluates term insurance options, he can begin by estimating the coverage needed using a simple multiplier of his average annual income. After deciding on the policy term, he can use an online premium calculator to get an estimate based on his details.
Adding optional riders, such as critical illness cover, may increase the premium slightly, but if the cost aligns with his budget, it can offer added protection. This process can help him in selecting the right plan while also bringing a sense of assurance about his family’s financial security.
Things to Keep in Mind
While choosing a term insurance policy as a self-employed individual, the following are important points to keep in mind for improved protection and policy value:
- Don’t get tempted by underinsurance- A low premium is tempting, but it may leave your family with financial insecurity.
- Review each year- As your earnings fluctuate, review your cover and determine whether it should be adjusted.
- Don’t miss riders- Certain riders, such as policy continuance benefit or critical illness cover, are extremely beneficial.
- Check Claim Settlement Ratio (CSR)- Axis Max Life Insurance, for example, has a high CSR, reflecting high trustworthiness in respect of claims.
Conclusion
Planning for the future isn’t just for the wealthy or those with fixed jobs. If you are self-employed, you have even more reason to build a financial shield around your loved ones. By knowing your income, understanding your needs, and using tools that make calculations easy, you can choose a plan that suits your life and budget.
