Photo: iStock
Photo: iStock

Your friends cannot be the beneficial nominees of a life insurance policy

Under the recent rules on nomination, a friend will not be a beneficial nominee. A beneficiary has to be a family member or a specified relative

I am single and have no dependents. Can I buy an insurance policy and make my friend a beneficiary? I have taken some loan from him, which I am repaying regularly.

—Rohit Bhatia

Yes, it is possible to make a friend a nominee in a life insurance policy. However, under the recent rules on nomination, your friend will not be a beneficial nominee. A beneficiary has to be a family member or a specified relative. Typically, these are your parents, spouse and children. To ensure that proceeds actually accrue to your friend, you will need to assign the insurance proceeds via a Will.

I took an endowment policy 2 years ago for Rs50,000 per annual premium, and the agent told me that after 25 years, it will give me Rs30,000 per month. I know it is very less when compared to mutual funds but I am a conservative investor who is happy with 7% tax-free returns in long term. Can you tell me if LIC Jeevan Anand will give 7% return or is there some catch?

—Nikunj Tendulkar

The return in a traditional endowment depends upon the bonus declared each year. This bonus in turn is a function of the insurer’s overall performance. This means that it is not possible to guarantee a return after 25 years in these traditional endowments. Insurers are required to give a company-prepared illustration to you that clearly specifies expected returns in different scenarios and also a clear view on what guaranteed returns are. Do take a look at that formal document before making a decision.

The recent Union Budget announcement says that long-term capital gains on equities will now be taxed. Will my unit-linked insurance plan (Ulip) investments get affected in any way? How are Ulip investments treated?

—Vivek Dutt

The detailed guidelines have yet to be notified but it appears that the new provision for long-term capital gain tax (LTCG) does not apply to Ulips. Proceeds from Ulips get covered for exemption under section 10(10)D, provided the premium is less than 10% of the life cover.

My brother recently bought an insurance policy. However, he suffered a heart attack and died a natural death while the free-look period was still going on. In this scenario, will the nominees—his wife and children—get the insurance money?

Yes. Free-look period is a facility for the customer to review the detailed policy terms and conditions. In case the proposer is not satisfied with the formal contract, she would have a right to cancel the policy. Free-look period starts from the date of receipt of original policy documents by the insured.

However, the insurance coverage is valid immediately on acceptance of the risk by the insurer. This is typically the policy inception date mentioned in the policy contract.

I am founder of a small company and have 40 employees in total. We are planning to buy life insurance for all the founders plus upper-level management (total 9 members). Should we buy an individual cover or is it wise to go for a group policy? What would be better? Going forward, we might also add all the employees under this scheme.

—Rahul Bahl

Group term life insurance requires a minimum of 10 people. You would have to cross this hurdle to buy a group plan.

Group and individual term insurances have different features. You can take individual term insurance for these nine members, under the employer-employee scheme. There are two benefits of this. First, premium will remain fixed for the entire term of the policy. Second, when individual employees leave the firm, they can transfer the policy to their name and continue the coverage by paying premiums themselves.

A group term life insurance plan has its own advantages. First, costs are lower than individual insurance. Second, group term insurance has a feature of free cover limit. Coverage below the free cover limit is exempted from medical underwriting. This helps in easy policy administration. Another feature is that new employees can be added whenever they join the company or the premium refunded if an employee leaves. The basic coverage for both plans is similar. Suicide is the only exclusion under an individual term plan, that too for the first year. Under a group term insurance plan, suicide could be covered even from the first day of coverage.

On balance, if you are over 10 people it may be better to opt for a group term cover.

You may want to also consider keyman insurance for key employees. This is also a term life insurance plan. In this, the death benefit is paid to the company if a key employee dies. This plan is meant to compensate the company for financial loss incurred due to the death of key employees.

Abhishek Bondia is principal officer and managing director, SecureNow.in

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