When a senior director at a mid-size firm in his forties was suddenly killed in a car crash, his firm could have been greatly impacted financially. Instead, his practice transitioned smoothly within the firm and even his dependents were paid handsomely for his holding in the business. This was because the company held a keyman insurance on the life of the director.
What is Keyman Insurance?
Keyman insurance is an important business insurance. It is typically a term insurance taken by an organization to compensate that business for financial losses that arise from the death or extended incapacity of a key person. The key persons are normally the senior most executives of the company. However, any person whose knowledge, work or overall contribution is valuable to the company can be insured.
In a keyman insurance the premiums are paid for by the company and are treated as a business expense, the death benefit is also received by the company. Since the objective is to protect the financial interests of the company, the insurance values are linked to the financials of the company and typically much larger than individual covers. Keyman insurance does not indemnify the actual losses incurred but provides a fixed benefit.
Many investors, banks and strategic partners insist that the companies they work with procure a keyman insurance.
Companies eligible for Keyman
• In general, keyman is provided to profit-making companies.
• The key person should not own more than 75% of the company.
• It should be a public or private limited company, venture capital/ PE firm or a partnership. A proprietary firm is not provided keyman insurance.
• The company should have been established at least 2 years prior to applying for a keyman insurance.
• An exception to the rule is that key-man insurance is provided to new, loss making firms if they have committed funding.
Individuals eligible for keyman insurance:
The keyman should:
• Possess high level of technical or professional knowledge
• Be difficult to replace with an equally qualified person
• Have experience in a particular line of business for a long duration
• Be a full-time official of the company
• Be above 18 years of age
• Be medically fit
There is no restriction on the number of keypersons in a firm.
• Attested copy of memorandum and articles of association
• Certified true copy of board resolution
• Copy of audited company accounts, profit and loss account, & balance sheet for the last 3 years (if it is a new company without a history of 3 years, business projections for the next 2 years and the funding letter stating the extent of funding locked-in needs to provided)
• Copy of last 3 year’s individual income tax return of the keyman along with computation of income or last 3 months salary slip.
• Application form - policy type - should be marked as Keyman
• Keyman questionnaire signed by the authorized signatory of the company
• KYC and PAN requirement of Policy Proposer
• If a partner has applied for the policy along with the above mentioned requirement, partnership deed, endorsement in the form of letter by all partners or supplementary partnership deed is required
Taxability for the employer
• Section 37(1) Act of the Income Tax Act of 1961 provides that any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed as a deduction in the computation of income from the business or profession.
• Death benefit proceeds received under keyman Insurance would be taxable in the hands of firm.
Plans offered under keyman insurance
• Term Plan
• Critical illness riders
• Accidental death and disability riders