{"id":3567,"date":"2016-11-23T12:06:45","date_gmt":"2016-11-23T12:06:45","guid":{"rendered":"https:\/\/securenow.in\/blog\/?p=3567"},"modified":"2026-02-09T06:50:03","modified_gmt":"2026-02-09T06:50:03","slug":"know-all-about-the-key-person-insurance","status":"publish","type":"post","link":"https:\/\/securenow.in\/insuropedia\/know-all-about-the-key-person-insurance\/","title":{"rendered":"Know All About the Key Person Insurance"},"content":{"rendered":"<div id=\"bsf_rt_marker\"><\/div><p>Have you ever considered insuring the most important asset of your business\u2014your employees? If not, then it is time to think about it.<br \/>\nThe 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 a similar role in the form of \u2018Key Person Insurance\u2019 for businesses also.<\/p>\n<h2 data-path-to-node=\"6\">Key Takeaways<\/h2>\n<ul data-path-to-node=\"7\">\n<li>\n<p data-path-to-node=\"7,0,0\"><b data-path-to-node=\"7,0,0\" data-index-in-node=\"0\">Business Continuity Fund:<\/b> The claim payout acts as a &#8220;buffer,&#8221; providing the necessary cash to hire a high-level headhunter, pay for a replacement\u2019s sign-on bonus, or settle debts that might be recalled upon a founder&#8217;s death.<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"7,1,0\"><b data-path-to-node=\"7,1,0\" data-index-in-node=\"0\">Investor Confidence:<\/b> For startups, VCs often mandate Keyman insurance. It proves to investors that the business can survive even if the &#8220;face&#8221; of the company is no longer there.<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"7,2,0\"><b data-path-to-node=\"7,2,0\" data-index-in-node=\"0\">The Valuation Math:<\/b> The Sum Assured isn&#8217;t random. It\u2019s calculated as the <b data-path-to-node=\"7,2,0\" data-index-in-node=\"73\">lowest<\/b> of:<\/p>\n<ol start=\"1\" data-path-to-node=\"7,2,1\">\n<li>\n<p data-path-to-node=\"7,2,1,0,0\">10x the Keyman\u2019s annual compensation.<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"7,2,1,1,0\">3x the average Gross Profit (last 3 years).<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"7,2,1,2,0\">5x the average Net Profit (last 3 years).<\/p>\n<\/li>\n<\/ol>\n<\/li>\n<li>\n<p data-path-to-node=\"7,3,0\"><b data-path-to-node=\"7,3,0\" data-index-in-node=\"0\">Portable Assets:<\/b> If a key employee leaves, the company can &#8220;transfer&#8221; the policy to the new employer or assign it to the employee personally. This turns a corporate risk tool into a valuable employee retention benefit.<\/p>\n<\/li>\n<li>\n<p data-path-to-node=\"7,4,0\"><b data-path-to-node=\"7,4,0\" data-index-in-node=\"0\">Restricted Flexibility:<\/b> Unlike personal term plans, Keyman policies do not allow riders (like critical illness or accidental death) or loans. They are pure protection tools meant for business stability.<\/p>\n<\/li>\n<\/ul>\n<p>As the name, implies, the key man is a major contributor to the business\u2019s success, and his or her absence would obstruct the company\u2019s growth.\u00a0 Also, known as key person insurance, Key Person insurance gives a financial safety net. The company receives the sum assured when the key employee dies, which is generally sufficient to hire another top-level executive and tide over the business downturn.<\/p>\n<h2><u>Protecting your most prized asset<\/u><\/h2>\n<p>The know-how judgment, skills, and expertise that 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 the business, but there can be one or more individuals without whom your business can\u2019t 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.<\/p>\n<p>The motto of key person 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.<br \/>\nHere key man can be any employee who has special skills and manages huge responsibilities and plays an imperative role in the profits of the organization. <a href=\"https:\/\/securenow.in\/individual-insurance\/keyman-insurance\">Keyman insurance policy<\/a> is a policy where both the proposer as well as the premium payer is the employer. It is the employee&#8217;s life that will be insured and the claim amount will go to the employer.<\/p>\n<p>Keyman can be a woman also and a company can have more than one Keyman. The policy tenure coincides with the retirement age or the contract period of the employee. Further, loans against the policy and riders are not allowed. Also, the nomination can be done only in favor of the company.<br \/>\nIt 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 key man policy.<\/p>\n<h3><strong>Advantages of Key Person Insurance for businesses<\/strong><\/h3>\n<p>Irrespective of the size of the 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 that are highly dependent on a few people.<br \/>\nAn 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.<img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-3571 size-full\" title=\"Keyman insurance policy\" src=\"https:\/\/securenow.in\/insuropedia\/wp-content\/uploads\/2016\/11\/Know-all-about.jpg\" alt=\"Keyman insurance policy\" width=\"627\" height=\"464\" \/><\/p>\n<h3><strong>Basic eligibility requirements to buy Keyman insurance<\/strong><\/h3>\n<p>To buy the insurance policy, the company must submit a comprehensive set of documents and a duly filled proposal form. Usually, documents include audited financial statements of the copy, a copy of the PAN card, filing IT returns, keyman\u2019s salary slip, and the board resolution to the effect that the company has decided to purchase keyman insurance.<br \/>\nFor insurance coverage, the company must be profitable. However, in certain cases, insurers make exceptions for loss-making, but well-funded start-up companies. Please consider the following aspects:<\/p>\n<ul>\n<li>Keyman insurance allows the purchase of only term insurance policies.<\/li>\n<li>The key man should hold less than 51% shares of the company<\/li>\n<li>The total number of shares held by the key man and his family should not be more than 70% of the total company\u2019s shares<\/li>\n<li>The company has to submit some proofs to validate that the key man is playing an imperative role in the business<\/li>\n<\/ul>\n<h3><strong>How much sum assured is sufficient?<\/strong><\/h3>\n<p>Typically, the investor takes the sum assured equal to the invested money. In this way, the investor ensures that in the case of the death of the entrepreneur, the company has sufficient money to hire a replacement or lower the recovery costs.<br \/>\nThe maximum sum assured is restricted as:<\/p>\n<ul>\n<li>Ten times the key man\u2019s annual compensation package<\/li>\n<li>Three times the average gross profit of the company in the last three years<\/li>\n<li>Five times the average net profit of the company in the last three years<\/li>\n<\/ul>\n<h3><strong>What if a key man quits the company?<\/strong><\/h3>\n<p>In this case, the employer who has bought Keyman insurance can choose any of the following options:<\/p>\n<ul>\n<li>The first company can stop paying the premiums and let the policy lapse<\/li>\n<li>The first company can continue paying the premiums and receive the amount on a maturity<\/li>\n<li>The key man and the new employer can mutually agree upon terms to transfer the policy<\/li>\n<li>The key man can assign the policy in their favor<\/li>\n<\/ul>\n<h3><strong>Taxation structure of Keyman Insurance<\/strong><\/h3>\n<p>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. Additionally, Keyman insurance allows the purchase of only term insurance policies.<br \/>\n<u>For the company<\/u><br \/>\nThe premium paid by the company for 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.<br \/>\n<u>For the key man<\/u><br \/>\nThe company pays the premiums for the policy, and it does not offer any tax benefit to the key man. If the key man assigns the policy, they can determine the nominee for the policy. Consequently, in case of the 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.<\/p>\n<h2 data-path-to-node=\"3\">Summary: Key Person (Keyman) Insurance<\/h2>\n<div class=\"horizontal-scroll-wrapper\">\n<div class=\"table-block-component\">\n<div class=\"table-block has-export-button\">\n<div class=\"table-content not-end-of-paragraph\" data-hveid=\"0\" data-ved=\"0CAAQ3ecQahgKEwjhoOnS4suSAxUAAAAAHQAAAAAQpQE\">\n<table data-path-to-node=\"4\">\n<thead>\n<tr>\n<td><strong>Feature<\/strong><\/td>\n<td><strong>Details<\/strong><\/td>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><span data-path-to-node=\"4,1,0,0\"><b data-path-to-node=\"4,1,0,0\" data-index-in-node=\"0\">Primary Goal<\/b><\/span><\/td>\n<td><span data-path-to-node=\"4,1,1,0\">Protect the company against financial loss due to the death\/illness of a key employee.<\/span><\/td>\n<\/tr>\n<tr>\n<td><span data-path-to-node=\"4,2,0,0\"><b data-path-to-node=\"4,2,0,0\" data-index-in-node=\"0\">Policy Type<\/b><\/span><\/td>\n<td><span data-path-to-node=\"4,2,1,0\">Strictly <b data-path-to-node=\"4,2,1,0\" data-index-in-node=\"9\">Term Insurance<\/b> only (as per IRDAI guidelines).<\/span><\/td>\n<\/tr>\n<tr>\n<td><span data-path-to-node=\"4,3,0,0\"><b data-path-to-node=\"4,3,0,0\" data-index-in-node=\"0\">Owner &amp; Beneficiary<\/b><\/span><\/td>\n<td><span data-path-to-node=\"4,3,1,0\">The Employer (Company). The employee is the &#8220;Life Assured.&#8221;<\/span><\/td>\n<\/tr>\n<tr>\n<td><span data-path-to-node=\"4,4,0,0\"><b data-path-to-node=\"4,4,0,0\" data-index-in-node=\"0\">Tax on Premiums<\/b><\/span><\/td>\n<td><span data-path-to-node=\"4,4,1,0\">Deductible as a <b data-path-to-node=\"4,4,1,0\" data-index-in-node=\"16\">business expense<\/b> under Section 37(1).<\/span><\/td>\n<\/tr>\n<tr>\n<td><span data-path-to-node=\"4,5,0,0\"><b data-path-to-node=\"4,5,0,0\" data-index-in-node=\"0\">Tax on Claims<\/b><\/span><\/td>\n<td><span data-path-to-node=\"4,5,1,0\">Treated as <b data-path-to-node=\"4,5,1,0\" data-index-in-node=\"11\">Business Income<\/b> and taxed at the corporate rate.<\/span><\/td>\n<\/tr>\n<tr>\n<td><span data-path-to-node=\"4,6,0,0\"><b data-path-to-node=\"4,6,0,0\" data-index-in-node=\"0\">Shareholding Limit<\/b><\/span><\/td>\n<td><span data-path-to-node=\"4,6,1,0\">Keyman must own &lt; 51% of shares; family total &lt; 70%.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<h2><strong>Conclusion<\/strong><\/h2>\n<p>For any company, its employees are its valued assets. So, <a href=\"https:\/\/securenow.in\/individual-insurance\/keyman-insurance\">buy keyman insurance<\/a> to protect your business from unforeseen events like the death, or sickness of a keyman, which are beyond your control.<br \/>\nIn business, no one is irreplaceable, but some are invaluable and therefore, it makes complete sense to secure \u2018those invaluable\u2019 with the right insurance policy. After all, it is a matter of your business success and you can\u2019t take it lightly, isn\u2019t it?<\/p>\n<h3 data-path-to-node=\"9\">Frequently Asked Questions (FAQs)<\/h3>\n<p data-path-to-node=\"10\"><b data-path-to-node=\"10\" data-index-in-node=\"0\">Q1: Can a loss-making startup buy Key Person insurance?<\/b><\/p>\n<p data-path-to-node=\"10\"><strong>A)<\/strong> Generally, insurers require the company to be profitable for at least three years. However, an exception is often made for well-funded startups where investors have already put in significant capital, as the &#8220;value&#8221; lies in the future potential of the founders.<\/p>\n<p data-path-to-node=\"11\"><b data-path-to-node=\"11\" data-index-in-node=\"0\">Q2: What happens to the policy if the key employee retires?<\/b><\/p>\n<p data-path-to-node=\"11\"><strong>A)<\/strong> The policy usually coincides with the retirement age. Once the employee retires, the &#8220;insurable interest&#8221; ends. The company can either let the policy lapse or, if allowed by the insurer, assign it to the employee as part of their retirement package.<\/p>\n<p data-path-to-node=\"12\"><b data-path-to-node=\"12\" data-index-in-node=\"0\">Q3: Is the claim amount paid to the employee&#8217;s family?<\/b><\/p>\n<p data-path-to-node=\"12\"><strong>A)<\/strong> No. In a standard Keyman arrangement, the company is the beneficiary. The funds are meant to stabilize the business. However, the company may choose to use a portion of these funds to provide a voluntary &#8220;ex-gratia&#8221; payment to the deceased employee&#8217;s family.<\/p>\n<p data-path-to-node=\"13\"><b data-path-to-node=\"13\" data-index-in-node=\"0\">Q4: Can a Partnership Firm buy Keyman insurance for its partners?<\/b><\/p>\n<p data-path-to-node=\"13\"><strong>A)<\/strong> Yes, but only for &#8220;Active Partners.&#8221; Since a partner-employer relationship is different from a director-employee one, the underwriting and tax treatment may vary slightly. Sole proprietors cannot buy Keyman insurance for themselves as they cannot be both the employer and employee.<\/p>\n<p data-path-to-node=\"14\"><b data-path-to-node=\"14\" data-index-in-node=\"0\">Q5: Are there any medical tests involved for the Keyman?<\/b><\/p>\n<p data-path-to-node=\"14\"><strong>A)<\/strong> Yes. Since the Sum Assured is typically very high (often in crores), the key employee must undergo comprehensive medical examinations to ensure they are in good health at the time of policy issuance.<\/p>\n<p><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"FAQPage\",\n  \"mainEntity\": [\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Can a loss-making startup buy Key Person insurance?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Insurers often prefer companies with a stable financial history, but exceptions may be made for well-funded startups with strong investor backing. In such cases, the future business value and importance of the key individual are considered during underwriting.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What happens to the policy if the key employee retires?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Key Person insurance is typically aligned with the working tenure of the insured individual. When the key employee retires, the insurable interest may cease. Depending on policy terms, the company may discontinue the policy or assign it to the employee if permitted by the insurer.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Is the claim amount paid to the employee's family?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"In a standard Key Person insurance arrangement, the company is the beneficiary of the policy. The claim amount is intended to help the business manage financial disruption. The company may choose to provide voluntary financial support to the employee\u2019s family, but this is not a policy requirement.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Can a partnership firm buy Key Person insurance for its partners?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Yes, partnership firms can generally purchase Key Person insurance for active partners who significantly contribute to the business. The underwriting and tax treatment may vary based on the structure of the firm. Sole proprietors typically cannot buy Key Person insurance for themselves.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Are medical tests required for the key person under the policy?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Yes. Since the sum assured in Key Person insurance is often substantial, insurers usually require comprehensive medical examinations to assess the health status of the insured individual before issuing the policy.\"\n      }\n    }\n  ]\n}\n<\/script><\/p>\n<h4><b>About The Author<\/b><\/h4>\n<p><strong>Subhash<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">MBA Insurance Management<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With seven years of experience in the insurance industry, Subhash is a recognized expert in term life and keyman insurance. As a dedicated writer for SecureNow, he crafts insightful blogs and articles that demystify the complexities of these insurance policies. He is passionate about educating businesses and individuals on the importance of comprehensive life and keyman coverage, making technical details accessible and practical. Their deep understanding of insurance regulations and best practices ensures that readers receive up-to-date and valuable information, establishing Subhash as a trusted voice in the insurance community.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Have you ever considered insuring the most important asset of your business\u2014your employees? If not, then it is 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 [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":3559,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"_lmt_disableupdate":"no","_lmt_disable":"no","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[554],"tags":[629,2155,2231],"class_list":["post-3567","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-term-life-keyman-insurance","tag-keyman-insurance-policy","tag-key-executive-insurance","tag-key-person-insurance"],"acf":[],"modified_by":"SecureNow","_links":{"self":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/3567","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/comments?post=3567"}],"version-history":[{"count":13,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/3567\/revisions"}],"predecessor-version":[{"id":35364,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/posts\/3567\/revisions\/35364"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/media?parent=3567"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/categories?post=3567"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/securenow.in\/insuropedia\/wp-json\/wp\/v2\/tags?post=3567"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}