Term Life & Keyman

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Human capital is integral to the valuation of any business, a company invests substantially to groom its employees. Keyman insurance plan is growing in importance due to the talent crunch and the need for specific skill sets to continue business innovation and sustenance.

Often, small and medium-sized companies depend on very few talented and competent teams; the death would lead to significant disruption in the organisation. This type of insurance is also important whist the dilution of ownership of the enterprise or in the event of raising funds from external sources for the growth of the organisation.

About Keyman insurance :

This insurance policy is one where the employee is insured. In case of death, a claim will go to the beneficiary and in this case, the employer. The proposer and the premium payer are the employers and the insured is the employee; who is a key person in the company. The key person can either have a special skill set, extensive customer relationships, or significant responsibilities and their contribution are significant to the company’s profits.

Eligibility for availing keyman insurance:

  • Enterprise should be profitable and possess an upward trending income statement. The key metrics revenue and profit should be positive and should show positive growth over the past few years. Loss-making entities cannot avail of keyman insurance.
  • Many well-funded startups are availing of this type of insurance as it helps them leverage talent, and build the business with innovation; which provides a competitive edge and business success.
  • Any enterprise backed by substantial funding and known names in the industry. Despite not having required historical financial statements can avail keyman insurance. The insurance companies repose faith in these companies that they will be able to turn the business profitable.
  • The company availing of this insurance should provide proof of profitability and revenue growth. The company should have at least:
    • 3 years of audited tax returns,
    • Proof of business registration,
    • Licence number,
    • A memorandum of undertaking needs to be provided to enable the insurer to assess the eligibility for availing of keyman insurance for the employee in the enterprise.
  • You need to provide proof of an employee’s significant contribution to the business and profitability to establish by a declaration of the skill/network, the lack of which will affect the business significantly.
  • An enterprise can have as many keyman insurances as it requires; provided it can establish its significant contribution to the company’s profitability. For example, in a start-up, all the co-founders are keymen. Similarly, in a partnership, all the active members can be keymen.

Additional Read: Availing a Term-life Insurance cover? Here’s a checklist for you!

Type of businesses that can apply for a Keyman Insurance Plan:

Business entities that can apply for this type of insurance plan are: 

  1. Partners, co-founders or owners of the business
  2. Key sales personnel
  3. Leadership team

In this context it is important to know the exclusions of keyman insurance:

  1. If the employee owns more than or equal to 51% of the enterprise, OR
  2. If the cumulative holding of the employee and his family exceeds 70% ownership in the enterprise.

Limitations of keyman insurance:

There is a maximum limit of sum assured up to which you can avail of keyman insurance.  Also, the maximum of the following conditions is applicable:

  1. 10x of the annual salary of the employee for whom the insurance needs to be availed, OR
  2. 5x of the average profit of the company in the last 5 years OR
  3. 3x of the average profit of the company in the last 3 years

A mandatory underwriting requirement for a keyman insurance plan is an assessment of the business entity before issuance of the plan. The factors which impact the quantum and eligibility of the insurance include the age and medical fitness of the key personnel.

Thus, based on an elaborate evaluation of all these factors, you can extend or reject the keyman insurance plan to the business entity seeking keyman insurance for its personnel.

Additional Read: Keyman insurance provides financial security to a firm during volatility

Benefits under the keyman policy:

Based on the mandate issued by IRDAI, the insurer considers only the term cover as keyman insurance. Endowment policy was earlier allowed as keyman policy. However, it is no longer allowed. The business entity can pledge its keyman insurance and avail of a loan. There are no riders under keymen insurance policies.

However, keymen insurance plans only have death benefits. There are no maturity or survival benefits available. The beneficiary in a keyman insurance plan is the business entity. The death benefit can be a replacement cost for the keyman.

There are 2 possible events that can lead to a claim, namely the death of the employee or a permanent disablement wherein the employee is unable to carry out work in full capacity. The term is pre-determined or can be as permanent life of the key personnel as appropriate for the business entity.

For example, partners or co-founders of the company may avail of keyman insurance for their entire lifetime; as compared to employees of corporates wherein the keyman insurance is for a shorter time frame.

Risks in keyman insurance plans:

The employee on whom the corporate draws the keyman insurance may quit the organisation. However, there are some options that the business entity may choose to do with the existing keyman insurance at hand, the entity may choose the most appropriate one:

  1. The employer can stop premium payments towards the keyman insurance and allow the policy to lapse.
  2. The employer may enter into an agreement with the keyman and transfer the insurance policy to the new employer based on the agreement with both employers.
  3. There is an option of converting a keyman insurance plan to an individual term insurance plan. So, if an employee quits the company, the company can choose to assign the insurance plan in the employee’s name. Thereafter, the keyman will have to continue to pay the premiums as applicable. Also, if there is an unfortunate event and a claim is raised, the payout would be done to the nominee or the family member as a beneficiary.

Taxability of benefit paid out under keyman insurance:

The sum assured paid to the business entity upon the death of the keyman is taxable as business income in the hands of the company. However, the death benefit will be tax-free if the insurance plan is assigned to the keyman upon exit from the company and is converted to an individual plan.

Advantages of keyman insurance to the employer:

  1. Being a critical resource in the business entity will work as very high self-esteem for the employee. This is likely to increase productivity levels substantially.
  2. The loss that the business may incur upon the death of the key personnel will provide a cushion for the company upon losing an employee who has been critical to the profitability of the company.
  3. The premiums paid towards this type of insurance are tax-deductible as a business expense for the employer paying the same.
  4. It also ensures that there is no disruption in credit lines and impact on day-to-day business operations upon the eventuality of the key personnel.

Additional Read: Why premium is lower in Group Term policy than in Individual Term Life?

Conclusion:

Keyman can be very important for small and medium enterprises which run with a very small team with critical skillsets. Thus, the business entity should ascertain the importance of the employee and quantify the revenue/profit contribution. Availing of this insurance at competent premiums and terms is also a challenge; given the various competitive products available in the market. In order to get more information, you can visit SecureNow which will provide a comprehensive comparison of various insurance plans available in the market; and choose the one that aligns with your requirement.

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