Choose a life cover based on your investment horizon

Most money back plans are endowment plans with low yield on investment and poor protection element


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I am considering to invest money in a start-up. I am advised to buy a Keyman insurance. How does it work?

—Pankaj Shailendra

In an early stage firm, success depends upon the founders. If they die your investment can be 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. 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 their investment.

The premium for keyman 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 be a high penalty. Unit-linked 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?

—K. Muthu

A money back policy pays a defined proportion of the sum assured at set intervals e.g., every 3rd year of the policy. Any bonus accrued on the policy is paid at 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, this 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 unit-linked insurance plan. Apart from life cover, a pension plan provides a protection of regular stream of payments after the person retires.

The major drawback with a pension plan is that the benefit is realised much later than in money back plans. A second disadvantage is that annuities are treated as income and taxed.

You should choose a plan based on 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 excluded?

—Neha Suresh

In individual insurances suicide is always excluded in the first policy year. However, in group insurance it is possible to waive off this exclusion. Some insurers will do it if your group size is large.

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