KEYMAN INSURANCE

A Key Man is the major driving force behind a business and has unique skillsets which are invaluable and indispensable for the company’s progress.

Loss of such a keyman would cause a financial strain on the company or a decline in the company’s earning capacity.

In order to secure the company from the loss of a Keyman, the company can avail a Keyman Insurance Policy for such invaluable employees. Usually, Companies opt for a Keyman Insurance Policy for Company Directors, Key Salespeople, People with Specialised Technical Skills or Key Project Managers.

There can be multiple Keyman in the company and the company can avail a Keyman Insurance Policy for all of them.

A Keyman Insurance Policy is a specially designed Term Insurance Policy purchased by the employer on the life of its key employees.

The Company is the nominee and the Key Employee (Keyman) is the Life Assured in a Keyman Insurance Policy.

The Company receives the Sum Assured in case of the death of the employee during the Policy Term. This compensates the Company against financial losses and reduction in earning capacity suffered by the Company on account of the demise of the Keyman.

In today's times, employees are one of the most valuable assets of the firm. Some employees with rare skills, knowledge and technical skills are critical to the success of the company.

The death of a Keyman could result in the company suffering numerous losses as listed below:

1. Loss of customers or sales attracted by the Keyman’s ability
2. Loss of Keyman’s special skills and abilities
3. Additional Cost of finding and training a suitable replacement
4. Delay or Cancellation of future expansion projects
5. Recall of Loans guaranteed by the Keyman
6. Reduction in Credit Rating of the Company

Hence, it is extremely important for the company to secure itself by insuring the life of their key employees in case of their untimely deaths with a Keyman Insurance Policy.

The objective of a Keyman Insurance Policy is to help a business to recover from financial losses and make funds available in case of the untimely demise of the Keyman.

The proceeds from the Keyman Insurance Policy may help the company to recruit and train the replacements of the Keyman and offer compensation to the family member of the deceased in case of his/her death.

A Keyman Insurance Policy expires when upon the retirement of the employee. So if the retirement age of the employee is 60 years, the Policy Duration will be 20 years for a 40 year old employee.

An employee should basically fulfill the following 3 criterias to be considered as a Keyman for the Company:

1. The 'Keyman' should hold less than 51% stake of the company he/she is working for *
2. The total number of shares of the company held by the Keyman and his family together should be less than 70% of the Company’s total Share Capital*
3. Proof of the Employee’s critical role in the business of the company is also required

* If the employee holds more than 51% stake or the company or the aggregate shareholding of the Keyman and his/her family members exceeds 70%, the eligibility of the cover will be worked out on the basis of Individual Income Proof.

The Tax Benefits for the Company under a Keyman Insurance Policy are as follows:

Tax Benefit on Premiums Paid:

Premiums Paid by the Company for a Keyman Insurance Policy are a tax-deductible expense. This lowest ha taxable profit for the company and lowers the tax outgo.

Tax Benefit on Death Benefit Received:

The Death Benefit received by the Company on the employee’s demise is fully taxable at the existing tax rates.

In case the employee leaves the job, the employer might assign the policy to the employee. In that case, the employee specifies a nominee to receive the death benefit.  The Death Benefir received would be added to the employee’s income and taxed at the tax slab rates applicable to the employee.