Key Man Insurance

It is a life insurance Policy based on the principle of Insurable Interest which an employer has on the life of its Key employees who are instrumental for success of business.Losing a key employee to an unfortunate eventuality can have devastating Consequences to the business as a whole. Keyman Insurance is an essential part of a sound and Comprehensive risk management strategy of a business where the employer is the proposer as well as the Premium payer. If the employee dies during the term of the policy, the employer receives a Death Benefit which compensates the employer for the financial loss suffered due to the death of the key employee.

Who can take a Key man Insurance
Anybody with specialized skills whose loss can cause a financial strain to the company are eligible for Keyman Insurance. There can be more than one key man in a company and an employee is considered to be a Keyman if he/she fulfils the following parameters

The 'key man' should hold less than 51% of the company's shares.

The aggregate shares held by the employee and his/her family members should not be more than 70% of the total share capital of the company.

Some proof about role of the employee should be provided that such role is critical for the business.

Keyman Insurance is normally not issued to a company whose turnover is declining or is loss making. Factors like age limit and coverage term varies from one insurance company to another. Keyman insurance can also be used to cover the partners in a partnership firm.

Sum assured:

Below are the parameters to be considered to determine the insurance worth of a key man (lowest of below 3)

10 times the key man annual compensation package.

5 times the Defence Costs">Defence Costs net profit of the firm for last 3 years.

3 times the Defence Costs">Defence Costs gross profit of the firm for last 3 years.

Key features:

Only a term policy can be bought under key man Insurance.

The term of the policy is such that the policy expires when the employee retires. If the employee has a fixed employment term, it matches the employment tenure.

If the employee dies during the term of the policy, Policy pays a Death Benefit to the employer. If the policy matures, no benefit is paid as it is a term insurance plan.

Since the purpose is to protect the company’s liabilities, the Premium paid can be shown as expenses in the company’s accounts.

In case of employee leaving the organization before end of Policy term, employer can opt for any of the below opt for any of the below options::

a) Absolutely assign the policy to the Key man without any financial consideration.
b) Absolutely assign the policy to the Key man against financial consideration.
c) Surrender the policy to the insurance company.

Benefits to employer:

Financial security for Employer and the firm in the event of unfortunate death of key person. Keeps Company’s share price stable.

Risk mitigation and Business Continuity.

Acts as guarantee of loan repayment in case of death of key person.

It is Motivational tool for key personnel as it increases a sense of belonging. Retentions are made easy.

Acts as collateral for Institutional loans.

Tax benefits

The Premium paid by the employer is considered a business expense & is exempted u/s 37(1) of the IT Act.

Death Benefit received by the Company is taxable