Know All About the Keyman Insurance

Have you ever considered insuring the most important asset of your business—your employees? If not, then it is the time to think about it.

The sudden demise, illness or accident of any key person in your company can largely impact your profits. Most of us know that a term insurance policy helps in financially securing the family after the demise of the breadwinner. However, the fact is that term insurance can play the similar role in the form of ‘Keyman Insurance’ for businesses also.

As the name, implies, key man is a major contributor towards the business’s success, and his or her absence would obstruct the company’s growth.  Also, known as keyperson insurance, Keyman insurance gives a financial safety net. When the key employee dies, the sum assured is paid to the company which is generally sufficient for the company to hire another top-level executive and tide over the business downturn.

Protecting your most prized asset

The know-how judgement, skills, and expertise which become the foundation of any business are found in people and not in the technologies or facilities. Everyone in your team contributes to the success of business, but there can be one or more individuals without whom your business can’t run. What would happen if that person dies? It could hinder your business. However, by buying keyman insurance, you would be more likely to survive and recover from the losses.

The motto of a keyman insurance is to compensate the employer for the losses that may arise from the loss of service of the key employee in case of sudden demise, sickness or injury. In this case, the company can recover the losses from the compensation received from the insurer.

Here key man can be any employee who has special skills and manages huge responsibilities and plays an imperative role towards the profits of the organisation. Keyman insurance policy is a policy where both the proposer as well as the premium payer is the employer. It is the employee life that will be insured and the claim amount will go to the employer.

Key man can be a woman also and a company can have more than one Key man. The policy tenure coincides with the retirement age or the contract period of the employee. Further, loan against the policy and riders are not allowed. Also, the nomination can be done only in favour of the company.

It is important to note that a key man policy is applicable only in case of an employee and employer relationship. As a sole proprietor and partner is not an employee, and therefore, any policy bought on the lives of a proprietor or partner is not a keyman policy.

Advantages of keyman insurance for businesses

Irrespective of the size of business, the death of a key person can make any company vulnerable. If the promoter dies, then the company is thrown into disarray and may not survive. Years of hard work can go in vain. The policy is essentially useful, particularly for family businesses which are highly dependent on a few people.

An additional benefit is that as premiums are paid by the company, they get tax benefits also. However, the death benefit received from the policy is taxable.know-all-about

Basic eligibility requirements to buy Keyman insurance

To buy the insurance policy, the company must submit a comprehensive set of documents and duly filled proposal form. Usually, documents include audited financial statements of the copy, the copy of PAN card, filed IT returns, key man’s salary slip and the board resolution to the effect that the company has decided to purchase keyman insurance.

The company should be profitable to be insured. However, in certain cases, insurers make exceptions for loss-making, but well-funded start-up companies.

Some of the things that should be considered are:

  • Only term insurance policies can be bought as Keyman insurance
  • The key man should hold less than 51% shares of the company
  • The total number of shares held by the key man and his family should not be more than 70% of the total company’s shares
  • The company has to submit some proofs to validate that the key man is playing an imperative role in the business

How much sum assured is sufficient?

Typically, the investor takes the sum assured equal to the invested money. In this way, the investor ensures that in the case of death of the entrepreneur, the company has sufficient money to hire a replacement or lower the recovery costs.

The maximum sum assured is restricted to:

  • Ten times the key man’s annual compensation package
  • Three times the average gross profit of the company in the last three years
  • Five times the average net profit of the company in the last three years

What if a key man quits the company?

In this case, the employer who has bought Keyman insurance can choose any of the following options:

  • The first company can stop paying the premiums and let the policy lapse
  • The first company can continue paying the premiums and receive amount on a maturity
  • The policy can be transferred to the new employer of the key man on terms mutually agreed upon
  • The policy can be assigned in favour of the key man

Taxation structure of Keyman Insurance

Prior to 2013, the surrender value and maturity proceedings received from Keyman insurance were tax-free. However, in 2013, the Income Tax Law made some changes. Now, the proceedings received from this insurance policy are taxable. Also, only term insurance policies can be bought as a Keyman insurance.

For the company

The premium paid by the company for a Keyman insurance is an allowable business expenditure and enjoys tax benefits under Section 37(1) of the Income Tax Act. Also, the claim proceedings are taxable as business income.

For the key man

As premiums are paid by the company, no tax benefit is offered to a key man. In case the policy is assigned to a key man, he/she can decide nominee of the policy. Consequently, in case of death of the insured during the policy tenure, his/her dependents would get death benefits which would be tax-free as per the Income Tax Act.

Conclusion

For any company, its employees are its valued assets. So, buy a keyman insurance to protect your business from unforeseen events like death, sickness of a key man, which are beyond your control.

In business, no one is irreplaceable, but some are invaluable and therefore, it makes complete sense to secure ‘those invaluable’ with a right insurance policy. After all, it is the matter of your business success and you can’t take it lightly, isn’t it?
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