Published in Mint on 30 December, 2015, Written by Abhishek Bondia
I am considering investing money in a start-up. I have been advised to buy a Keyman insurance. How does it work?
—Anshuman Gulati
In an early-stage company, success depends upon the founders. If they die, your investment can get wiped out. That’s why investors purchase a Keyman insurance on the life of the entrepreneur. In case the person dies, the sum assured is received by the firm. The investor, typically, takes the sum assured equal to the money invested. This way the investor ensures that in case the entrepreneur dies, the firm has enough money to hire a replacement or wind down operations and recover its investment.
The premium for a keyman policy is paid by the firm and the proceeds also come into the firm. The death benefit is treated as income and taxed.
I have not paid premium for some time. I want to discontinue my policy. Do I get anything back?
—Gaurav Shetty
You can surrender the insurance and get whatever surrender value is there. For traditional insurances, the surrender charge varies by year and can have a high penalty. Unit-link insurance plans (Ulips) can be surrendered after five years and there will be no surrender charge.
Could you tell me the difference between a money back policy and a pension plan? Which is a better option?
—Sunaina Shetty
A money back policy pays a defined proportion of the sum assured at set intervals, say, every third year of the policy. Any bonus accrued on the policy is paid at the end of the plan period. A pension plan is a deferred benefit plan wherein a corpus is built over the initial years in the policy. After reaching the vesting age, the corpus is used to buy an annuity plan. The annuity plan makes a constant stream of payments.
Most money back plans are endowment plans with low yield on investment and poor protection element. A pension plan could be either an endowment or a Ulip plan.
Apart from life cover, a pension plan provides protection of constant stream of payments after the person retires. But a major drawback with a pension plan is that the benefit is realised much later than with a money back plan. A second disadvantage is that annuities are treated as income and taxed.
You should choose a plan based on your investment horizon, risk appetite and liquidity needs. All things remaining same, pension plans offer better returns and protection.
We are buying a group term cover for our company. Can the exclusion of suicide in the first year be waived?
—Ramesh Gupta
In individual insurances suicide is always excluded in the first policy year. However, in group insurance it is possible to waive this exclusion. Some insurers will do it if your group size is large.
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