Keyman insurance is being sought after by many small and medium businesses that are often run by a small team of competent and highly committed members. Typically, start-ups that run based on certain skill sets or networks have extremely valuable human capital; they may choose to avail of keyman insurance policy on those employees who could be detrimental to the company’s success and profitability. So, read further to know about Availing keyman insurance cover.
You must know the nuances of keyman insurance before availing of the policy. Here’s a list of key details that you should keep in mind before you avail of the plan.
Eligibility criteria for the employer/company/business entity
- Any organization which is profitable and has an upward trending revenue/profit can avail of keyman insurance. Loss-making companies will not be able to avail of keyman insurance.
- Even a well-funded startup can apply for a keyman insurance plan without historical books to serve as proof of business profitability. It is an increasing trend among start-ups to insure their key personnel; many of them primarily due to the skillsets and the network which is critical for the business success. Such companies also ensure to appropriately hedge the loss due to delays in the onset of the project involving the key personnel. Often, insurers extend the keyman insurance to these companies despite their lack of financial statements by looking at:
- The funds they have raised,
- The ownership pattern,
- Board members’ reputation and
- The stakeholders they cater to. Note: This assumes that they have been able to raise as many funds. Then the business should have the required mettle to turn profitable.
- As part of the procedure, the company has to submit proof of profitability and revenue growth. The company should be in existence for at least 3 years. Submission of the audited tax returns for the 3 years is also a part of the documentation process. The proof of business establishment and required licenses are needed have to be provided to enable the insurer to ascertain your eligibility in availing keyman insurance for an employee who is employed in your business entity.
- There is no restriction on the number of keyman insurance that can be availed; depending on the contribution made by the keyman to the profitability of the company. In case the business entity is an LLP (limited liability partnership) or any other form of partnership; all the active members in the partnership can function as keymen.
Eligibility criteria for employee
- The keyman of the organization needs to own less than 51% of the business/company. The combined holding of the employee and his family should not exceed 70% of ownership in the company.
- There should be sufficient evidence of the employee being a key resource and having a significant impact on the business entity’s success and profitability.
- As part of the documentation, there has to be enough evidence to justify the claim of the employee is a key resource. This could be due to the expertise, experience, skillsets, network of clients, credit line, etc., which is critical to the business growth either directly or indirectly.
Limitation on keyman insurance
Although there is no maximum number of keyman insurance plans; one can opt for multiple plans, as long as it is justified appropriately with the required documentation. There is a maximum limit to the total coverage one can avail of under the keyman insurance. It is the maximum of the following conditions:
- 10x the annual package of the identified key personnel
- 5x the average profit earned by the company in the last 5 years
- 3x the average profit earned by the company in the last 3 years
The insurer will assess the requirement of the keyman insurance for the business as part of the underwriting process. This will include looking at multiple aspects including the age and health condition of the keyman based on which the insurer will either choose to extend the insurance or reject the same.
The documentation required for keyman insurance is quite elaborate, there are multiple documents to be provided by the company and the key personnel as well. The key person needs to undergo a medical test if required.
Read more: Importance of a Keyman insurance cover
Note: The employee is the person insured; however, the onus of premium payment is upon the company and the beneficiary is also the business entity.
Types of keyman insurance allowed and benefits from the policy
Earlier, IRDAI allowed the issuance of endowment policy as keyman insurance. However, as per the latest mandate, only term cover is allowed as keyman insurance. The entity cannot avail of a loan against the keyman insurance, there are no riders available under these policies.
Further, the coverage is subject to any eventuality of the key personnel or permanent disablement for which the key person is not able to function in full capacity in the best interest of the business. The term can be for a pre-determined period or permanent life as appropriate for the business requirement.
Since this is term insurance, the only benefit available is the death benefit or the sum assured. The sum assured will ensure that the business continues to operate without any hiccups. There is no restriction on how the sum insured is used as long as the funds are used for the betterment of the business. It may be used as working capital requirements, capital expenditure, hiring a competent replacement or paying off debt, etc.
The death benefit is taxable in the hands of the company as business income. Keyman insurance plans should work as a personal life insurance policy as well. Also, the employee can nominate a beneficiary, in the event of a death benefit payout, which will be tax-free in this case.
Ascertaining the alignment of keyman insurance with business requirement
Here are some points that you may want to consider before availing of keyman insurance for the most resourceful employees in your company.
Compare available plans to ensure that the coverage amount is sufficient to cover the loss of the employee. This could be done only by doing a projection of the revenue loss due to the loss of the employee.
SecureNow offers a comprehensive comparison across most of the offerings in the market. By analyzing the same, you will be able to choose the plan that fits your requirement appropriately at the most competitive premiums.
Strength and reputation of the insurer:
Many new insurers the pretext of expanding their base, provide insurance at competent rates. However, they may not have a good reputation in terms of servicing or claims management.
It is important to evaluate these aspects before signing up for a contract. Insurance is typically a long-term commitment, and one should spend time researching to ensure that one aligns with the best in the industry.
While it is important to choose competent premiums, it is also critical to know the insurer’s reputation and strength.
Although the premiums paid by the company are tax-deductible as a business income; it is always prudent to choose the most competitive rates. Associating with a reputed insurer is equally important. But one should not oversee the benefit of comparing across vendors to ensure that they get the maximum bang for the buck.
Fixed premium payments:
This is an important feature to consider if you are availing of keyman insurance for a relatively young employee; then the premiums are likely to be low since the premium is a factor of age and health condition of the insuree. Choosing a vendor who will provide fixed premium payment will prove beneficial over the long haul.
In the event, the employee quits the company, the employer should be able to assign the policy to the employee. Another alternative is to let the policy lapse. In case of policy assignment to the employee; it will be a regular term insurance policy wherein the employee can nominate a beneficiary of his / her choice.
Claims management by the insurer:
This is yet another aspect that one can check before signing up with an insurer. One should be aware of the procedure and the timeline of the claims and how long it takes the insurer to settle. There is enough data available in the public forum; which would provide the required details to decide to associate with the insurer.
More Indian companies are going for key man insurance due to the increasing importance of key employees in the success of a business. Key man insurance provides financial protection to the company in the event of the death or disability of a key employee. This helps companies mitigate the financial losses and potential disruption to their business operations that can result from the loss of a key employee. Additionally, key man insurance can also act as a recruitment and retention tool, as it can provide a sense of security to key employees and their families. As companies become more reliant on key employees, key man insurance has become a crucial aspect of risk management for many Indian businesses.
If you are intending to avail yourself of keyman insurance; then this article should help you look for the right criteria whilst selecting the insurer with whom you would want to associate. SecureNow can help you do a nuanced comparison across all the offerings. Remember to make an informed decision!
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