Ask Mint Money | Keyman and term: structure same, aim and tax treatment different

Published in Mint on, Jun 05 2012. Written by Kapil Mehta


I have three unit-linked insurance plans or Ulips—total sum assured is Rs 35 lakh. A friend is asking me to buy another endowment plan, which gives a cover for life. Should I buy?
—Puja Ahuja

An endowment with insurance cover for life does a poor job of combining the objectives of investment and protection.
If your family is financially dependant upon you, then purchase a term plan with a sum assured that is 10 times your annual income less the Rs 35 lakh of cover that you already have.
If investment is your primary objective, then purchase a Ulip with the intention of investing for at least 10 years. Alternately, you could also invest in good quality mutual funds.

My brother suffers from asthma. Will life insurance be expensive for him?
—Damoder M

When your brother approaches an insurer, he will be given an additional questionnaire on asthma. This form will include questions regarding the extent of asthma and medication. The insurer will use this information to set the insurance price.
In general, premiums increase by 10-20%. Your brother should buy a product where the insurer does a proper medical check-up. This will ensure that the company understands the medical condition completely and has no grounds for claim repudiation.

I am 46 years old and own 50% shares in a private limited company with a turnover of Rs 10 crore. I draw Rs 50 lakh per annum. Should I buy a term plan or keyman insurance?
—R. Khan

In terms of product structure, keyman insurance is a term insurance plan. However, the objectives and tax treatment of both are different.
Keyman is meant to compensate the company and so the sum assured is linked to the financial loss that the company would incur if the employee dies. The entire premium is treated as a tax-exempt company expense and the death benefit is paid to the company and is taxed at corporate tax rates.
Term plan compensates the insured’s nominee. Premiums have tax benefits under section 80C and death benefit paid to the nominee is tax-free.
You need both covers. If you were to die early, individual term will provide direct financial help to your family. Keyman will ensure that your company remains financially strong. Ultimately, this will benefit your heirs.

I am 30 years old and have a one-year-old son. How much life cover would be adequate for me? What kind of insurance plan should I buy?
—Avinash Uday

Buy a term insurance cover. The sum assured should be 10 times your annual income less the sum assured of any other life insurance policies that you already have. At your age, a Rs 50 lakh sum assured for 30 years will cost about Rs 7,000 per year.

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