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Published in Mint on Nov 10 2016, Written by Abhishek Bondia

I and four of my friends have got together to start a business. We have hired 15 more employees. I have read somewhere that a company should buy ‘keyman’ insurance. Can you please explain what this it and what are its benefits for a setup like ours?
—Rohit Khatri
A keyman insurance is essentially a term insurance that a firm buys on the life of its key executives. In case of death of the insured executive, the firm receives a lump sum death benefit. Key executives strongly influence earnings of a company. A sudden demise leads to loss of future earnings, turmoil and uncertainty about the future. Keyman insurance provides financial security to the company because the money can be used to tide over short-term earnings fluctuation and even hire a replacement key person. It becomes most relevant when professional investors come in or when a company is dependent upon a few people for success. The premium for this insurance is paid by the company and treated as an expense. The death benefit is paid to the company and taxed as income.

I and my wife want to buy a life insurance policy. We don’t have any other dependents apart from each other. Should we go for a joint life cover or individual policies?

—Ashish Reddy
I recommend individual policies over joint life policies. Joint life policies have limitations. While joint life policies are meant to give a discount because they cover two lives, the plans available today are more expensive than the economical individual plans. The number of joint life options are limited. Also, administratively, it is difficult to discontinue coverage on one life under a joint life plan.

I want to surrender my term plan. Is there any surrender benefit that I will get on this?

—Ritesh Kumar
Typically, term plans do not carry a survival maturity value or a surrender value. A term plan is a pure protection plan and premiums are paid towards mortality charges. There is no corpus being built up like with an endowment or a unit-linked insurance plan (Ulip). The only exceptions are whole-life policies and return of premium plans. Both plans operate as endowments and give a small surrender value.

Is there a limit to how many life covers an individual can buy? Will all insurers pay the sum assured for something like an accident?

—Kunal Singh
There is no limit to the number of life policies one can buy on oneself. However, there is an upper cap on the aggregate sum assured one can purchase. Generally, insurers are reluctant to offer cover beyond 20 times a person’s annual income. This upper limit is aggregate of all life covers that a person has. To verify this, insurers ask for proposers to declare their existing insurance policies in the proposal form. Life insurance policies are fixed-benefit policies.
In case of an insured event, all polices would pay up the benefit sum assured. Payout of one policy is not dependent on the benefit availed from another policy.

Is there a major difference between policy benefits of public sector and private sector insurers? Should I pay a high price for a certain kind of insurer?

—Kush Sharma
The ownership of a company, i.e., government or privately owned, influences the company’s philosophy but does not necessarily translate into a common pattern for policy benefits or servicing capabilities.
For instance, the basic term insurance benefit and contracts are the same across insurers. Exclusions are also standardised.
Instead of looking at ownership, I recommend you evaluate insurers based on their actual performance track record.
One way to assess that for life insurers is to see their claim settlement track record. Consider insurers with over 90% claim settlement ratio.