Employer-employee insurance: A tax-efficient way for SMEs to purchase insurance

Published in Economic Times on 9 June, 2015, Written by Kapil Mehta

What is employer-employee Insurance?

The employer-employee structure is one where the company buys insurance but the beneficiary is an employee. It is a benefit given by the company to select employees. In today’s context this is particularly relevant because attracting and retaining employees is so much more difficult. The employer-employee insurance policy works as a reward program for the employees.

The insurance is also relevant for promoter run companies w here the promoter would like his or her insurance expenses paid for by the company. A common tendency is to confuse employer-employee insurance with keyman. The two are very different. While keyman can only be term life cover, employer-employee structures can be used for any kind of insurances. In keyman the insurance benefit on death is paid to the company and is subject to income tax. However, in employer-employee the benefit is paid to the employee and is tax free.

What are the benefits of the scheme to the firm and the employee?

This concept helps the firm reduce attrition and promotes employee satisfaction. It is definitely a motivating factor for an employee when his/her employer takes insurable interest in the life of an employee. Employee gets the benefits of the insurance cover without paying for the same. The maturity or death benefits are tax free and belong to the employee. The structure can be used to purchase any kind of insurance. It is most common to use for life insurance purchases.

Who can be covered under employer-employee scheme?

A sole proprietor or a corporate or any other legal firm with minimum 5 employees can buy this policy. One single cheque has to be drawn by the employer for all the employees he wants to cover.

Indian employees who are on payroll of the company fit to the criteria of employer-employee insurance policy. NRI employees can also apply for the policy provided employer has a registered office in India. The employee should be more than 18 and less than 60 to be eligible for the policy.

How can SMEs buy this scheme and avail of the tax benefits?

An employer can decide the quantum of insurance on the basis of CTC, qualification, experience and previous record of the employee.

A proposal form stating that they have opted for the employer-employee scheme & will be paying premiums on behalf of the employee has to be signed by an authorized signatory of the Employer along with the seal or stamp of the entity. It should also mention the names of the employees to be covered along with the Plan type, Term, Sum assured, & the riders. The assignment form duly filled in and signed by the authorized signatory making an assignment in the name of the employee should be submitted to the insurer at the proposal stage. The nomination form duly filled in and signed by the employee making a nomination should also be submitted at the proposal stage.

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