Just like the breadwinner in a family is considered to be the key to its survival, certain people in an organization contribute significantly towards its growth and sustainability. These people are so important to the employer that losing them could leave the company unstable and in long-term debt for a considerable period.
There is always a fear of losing such key employees for the employer due to any unexpected happening like his death, total disability, or just in case he chooses to shift jobs. It can affect the business and lead it to incur losses as replacements for such a keyman are almost impossible to find immediately.
In today’s competitive world, employees are playing a significant role in the proper functioning of the organization. They are hard to find and harder to retain. If as an employer, you are thinking about what to do to reduce business risks if the key employee leaves the organization or faces death and disability due to an unfortunate incident; here’s the best solution to consider! In such a case, it is most feasible to opt for keyman insurance.
Keyman insurance is a term insurance plan that is moulded for a special purpose. It is a protection plan that is availed for the life of an essential employee with the benefits (sum assured) going to the employer in the case of the loss of a keyman due to any reason. The premium of the policy is to be paid by the employer himself. The premium rate depends on the age of the key employee who is being insured. The lower the age; the lower will be the premium rates. In the case of a partnership firm, this policy can be availed to insure the lives of the partners to protect the business from any losses incurred in case of the death of any partner.
The keyman insurance policy covers the loss of an essential employee in the form of monetary value in order to reduce the monetary risks the business may face in such a case. To avail of this policy, an organization or employer needs to be clear on the meaning of the term “keyman”.
Keyman (applies to both genders) is basically a person who handles substantial responsibilities without which an organization has the risk of facing huge losses and is likely to become unstable. Any employee who is considered to be critical to the business of an organization is eligible under this policy if:
- He/she holds must not own more than 51% of the company’s shares
- He/she and her/his family must own not more than 70% of the company’s shares
The employer needs to submit some proof of the critical responsibilities handled by the proposed employee. In most cases, the key employees include the directors of the company, a key sales employee, a key project manager, or someone with a special skill required for the organization.
Businesses that are incurring losses do not get this policy unless there are special circumstances. This is because the sum assured of this policy is most directly linked to the profits of the company. So, in the case of constant losses the coverage cannot be decided or availed.
There are several benefits of this policy and the first and foremost benefit is that by availing this policy for a key employee, the said employee is further motivated to work more dedicatedly for the organization. The employee is ensured that he is significant for the very functioning of the company and is in the good books of the employer. This will automatically improve his productivity and; in turn, benefit the company.
However, in the case of the death of a key employee, this policy ensures that the company’s shares remain stable. The investors are likely to retain the shares of the organization even in the case of the death of the keyman if they are aware that there is a backup plan to cover any resulting losses or pay up the loans incurred on the employee’s proposal. The employer also benefits from a taxation point of view as the premium paid on this policy is considered to be a business expense.
According to the current tax law, the company can claim a deduction on the premium paid under Section 37(1) of the Income Tax Act. To add to its value, certain insurers like SecureNow also provide certain extra benefits like accidental death or disability and critical illness cover under the same policy.
Moreover, if the organization is being sold off, its valuation is protected if it already has the monetary compensation for losing the key directors or employees who have been responsible in the past for its stability.
Thus, if you own an organization that is dependent on certain important employees for most of its functioning and profits, then, availing this policy will be the best bargain to reduce your business risks!