Keyman Insurance Policy

Businesses need experienced and skilled individuals to plan, execute and implement business decisions so that the business can run and grow. In such cases, if the key employee who is responsible for leading the company’s future growth dies, the business faces substantial loss. Business under such scenario loses technical know-how and skill of the key employee, which helped its growth. It is to cover this loss businesses buy keyman insurance policy.

Only term insurance plans can be bought under Key person insurance policy. The term of the policy is such that the policy expires when the employee retires. If an employee dies during the term of the policy, insurer pay death benefits to the employer. 

Any employee with specialized skills, whose loss can cause a financial strain to the company, is eligible for Keyman Insurance. Keyman insurance can be bought as a cover for Directors of a Company, key sales people, mission critical project managers, people with specific skills etc. Keyman can be any person from an organization/ partnership firm/ sole proprietor (except the proprietor)  without whom the smooth functioning of the organization is hampered drastically.

Keyman insurance or Key person insurance policy is defined as an insurance policy where the proposer as well as the premium payer is the employer, the life to be insured is that of the key employee and the benefit, in case of a claim, goes to the employer.

Every company has a wide range of employees with defined roles and responsibilities. However, of these group of employees, some play a critical role in the functioning, performance, or profitability of the company. These key employees can include the best salespeople, high-level executives or decision-makers, or sometimes, even junior IT employees that are playing a crucial role in the company’s performance. So, it is for such key employees companies can purchase a Keyman Insurance Policy for: Below are some highlights of the Keyman Insurance:

• Company is the proposer in the policy
• Premium payments are done by the company
• The life of ‘key’ employees is insured for a fixed amount
• The company is the beneficiary of the policy

Hence, a keyman Insurance policy offers financial cover to the company for the losses arising due to the death of its key employees.

Below points highlight the benefits of Keyman Insurance policy:

• Offers financial protection to the company from losses due to the death of its key employees
• The premium payable for a Keyman Insurance Policy can be treated as Business Expense u/s 37(1) of the Indian Income Tax Act, 1961
• Policy cover helps boost the morale of key employees and also improve retention and productivity
• Its coverage helps keep the company’s share price relatively stable due to better investors' confidence on financial protection due to the death of a key employee
• It helps boost the valuation of the company because of the monetary support if it loses its key employee

Therefore, the objective of Keyman insurance or key person life insurance is to safeguard the company financially, in case of an untimely death of the keyman, through insurance proceeds.

Keyman insurance or key person life insurance policy is important for many big and small businesses. It is particularly important for family businesses that are highly dependent upon a few individuals. The policy helps ensure that the business can absorb the financial strain of an early death and continue sustainably. A key man policy is suitable for below businesses:

• Public Limited and Private Limited Firms, for key employees who hold less than 51% of company shares and key person along with family cannot hold more than 70% share
• Partnership Firms can have Partnership Insurance on all partners
• Proprietary firms for key employees (firm cannot take keyman Insurance on proprietor though).

The low cost and convenience of buying keyman insurance policy makes this very important business decision.

A Keyman Insurance Policy can be used in a variety of ways to help a company recover from the loss of a key employee. The lump sum payout from the policy can be used to cover costs such as recruiting and training a replacement, covering the lost revenue or profits, and paying off any outstanding loans that were taken out by the company and were dependent on the key employee's continued involvement. Additionally, the payout can provide the company with some financial stability and security during a difficult period, allowing it to continue operating and serving its customers.

The keyman insurance policy has a greater sum assured as compared to an employer-employee policy since the losses caused by the death of a key person can result in huge monetary losses to the business.

An employer-employee insurance policy is one in which the employer or company purchases insurance policy and the beneficiary is its employees. Under the employer-employee policy, the death benefit proceeds are provided to the late employee's family, as a compensate for the loss of income.

Keyman Insurance, also known as Key person insurance policy, is a type of life insurance policy that provides financial protection to a company in the event of the death or disability of a key employee. The policy is taken out by the company and the key employee is the insured person.

The policy pays a lump sum benefit to the company in the event of the death or disability of the key employee, which company can be used to cover expenses such as recruiting and training a replacement, paying off debts, or compensating for lost profits.

Keyman Insurance can be customized to meet the specific needs of a company. For example, the policy can be structured to cover only certain types of disabilities or to provide different levels of coverage for different employees.

In summary, Keyman Insurance provides financial protection to a company in the event of the death or disability of a key employee, helping to ensure the company's continued success and stability.

Key Person Insurance comes with the following listed general exclusions :

• The Key Person leaving the company (i.e. a scenario where there is no death or disability)
• Fraud, misrepresentation, or intentional act of dishonesty by the Key person
• Death of the Key Person by suicide

Furthermore, any fraudulent statements, with-holding information, or deliberate omissions made during the application process of the policy will result in claim denial

For Keyman insurance any sum assured amount is possible if it can be justified. A simple formula which is commonly used to determine maximum sum assured for Keyman Insurance would be:

• 10 times the keyman’s compensation
• 3 times the average gross profit of the company during past 3 years
• 5 times company’s net profit in last 3 years

However, how much insurance a company needs will depend on the size and nature of the business and the key person's role. Keyman insurance premium amount will also depend on whether the company buys policy for a specified term or opts for a permanent one. Specific term option is generally much cheaper. In addition, the cost of the keyman insurance cover will vary according to the insured person's age and his overall health. For example, a lower figure - typically up to five times earnings - is used for critical illness cover, against up to 10 times of individual’s earnings for life cover.

Documents required while purchasing a Keyman insurance or key employee insurance policy include:

• Memorandum and Balance Sheet of the firm
• Copy of audited financial statements
• 3 years ITR of firm and insured
• Board resolution of firm seeking keyman insurance with clarity on how death claim will be treated
• Copy of PAN card
• Keyman questionnaire justifying sum assured

Employers that pay for their employees' keyman insurance can deduct the premiums as a business cost under Income-tax Act Section 37(1). Thus, you can save on taxes while filing Income Tax Return if you utilize Keyman Insurance policy. This is because it’s treated as `profit in lieu of salary' in the hands of the employee. The policy is beneficial from the keyman's point of view. This is in case the company decides to endorse the policy to the keyman.

Below noted are some important things to know about Keyman Insurance policy taxability:

• Premium paid by the company - Companies can treat the premium paid as a business expense and claim tax deductions under Section 37(1) of the Income Tax* Act, 1961. This can help reduce the tax liability of the company.
• Death Benefits that the company receives - In key person life insurance policy, if the key employee dies, then the company receives the death benefit. This amount is taxable at the existing tax rates. If the employee of the company leaves his/her job, then the employer can assign the insurance policy to that employee, who can specify a nominee who will receive the death benefits. In such cases, the death benefit becomes an addition to the income of the employee and is taxed as per the applicable rates for them