Published in Mint on, Apr 30 2013, Written By Kapil Mehta
I am a 29-year-old male and I smoke. I plan to buy a term insurance for myself though I have no dependants as of now. But I think I will get married sometime soon and may have dependants soon. What all factors should I keep in mind while buying an policy?
—Abhisant
You should purchase term insurance early on. Ensure that the sum assured is about 10 times your annual income. Make sure you clearly disclose your smoking habit. Non-disclosure is one of the most common reasons for claim repudiation. Insurers follow diverse approaches in pricing term insurance for smokers. Some charge a large premium to smokers, others keep the difference between smokers and non-smokers small and still others have one rate for everybody. Identify the insurer that offers you the best rate. You should be able to buy Rs.1 crore of insurance for about Rs.20,000-25,000 per year.
I would also recommend that you buy a critical illness rider. This will pay you a fixed benefit if you are diagnosed with cancer or other pre-specified diseases. This will cost you Rs.2,000-3,000 for a sum assured of Rs.10 lakh.
What is a keyman policy and what are its benefits? I am a partner in my family business. How important is it to have such a policy?
—Krishna Kant
Keyman insurance is meant to protect a company from financial loss if a critical employee or director dies. I prefer to use the term keyperson insurance because it does not assume that the key employee must be a man.
Keyperson is a term insurance policy where the sum assured is linked to the profitability of the company rather than the key person’s own income. The premium is paid by the company. This is tax efficient as the entire premium is treated as business expense. In case the key person dies, the benefit is paid to the company. Unlike individual insurance policies, the death benefit in a keyperson insurance is taxed as income.
The insurer will look at the business’ audited financial statements and filed IT returns in assessing the sum assured. Generally, the company must be profitable to be eligible for keyperson insurance. In a few cases, I have seen insurers make exceptions for loss making but well-funded start-up companies. Another important condition for keyperson insurance is that the key person insured must have less than a certain shareholding. This can vary between insurers but generally the norm is for the person to have lower than 50% shareholding.
Keyperson insurance is important, particularly for family businesses that are highly dependent upon a few individuals. It helps ensure that the business can absorb the financial strain of an early death and continue sustainably.
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