What is Keyman Insurance: Advantages of Keyman Insurance

Who Is A Keyman?

Every business organisation has a range of people with defined roles and responsibilities. Some people play a critical role in the business organisation's functioning, performance, or profitability. The absence of such a person may lead to a decrease in revenue, profits, and project delays.
 

Directors, key project managers, key salespeople, and other people with valuable specialised skills are some examples of keymen.

What Is Keyman Insurance?

Keyman insurance is a type of life insurance policy that covers the business organisation for losses arising from the death of its key people. The employer pays the premium, and if the insured person dies during the policy term, the employer receives the death benefit.
 

When a business organisation feels that the absence of certain key members or people can greatly affect its performance, then it buys a keyman business insurance policy where:
 

• The policy is proposed by the business organisation.

• Premium payments are made by the business organisation.

• The life of 'key' people is insured for a fixed amount.

• The business organisation is the beneficiary of the policy.

Features Of Keyman Insurance Policy

• As per IRDAI guidelines, only pure term insurance plans could be purchased as keyman insurance.

• The policy's maturity date is usually equal to the person's retirement date or the expiry date of the contract between the person and the business organisation.

• Add-on covers and loans against the policy are not permitted.

• The business organisation can be the only nominee.

Advantages of Keyman Insurance Policy

Keyman insurance is important specifically for businesses that depend on a few individuals. The insurance helps to absorb the strain caused by the death of a key person and helps to continue the business in a sustainable manner. The lower cost and the host of benefits make keyman insurance an important aspect of a business.
 

• Sum assured

  In case of the insured person's death, the business organisation receives the sum assured, which helps it deal with the loss and continue the business without any issues. The sum assured could also be used for recruiting and training the person for replacement.
   

• Financial help to the family

  The sum assured received by the business organisation could also be used to help the family of the deceased person. The insured person's untimely demise can lead to financial stress on the family, so the business organisation could use the sum assured to provide compensation to the family.
  
  

• Tax* benefits

  According to Circular No. 762 issued by CBDT, the premium paid by the business organisation for the keyman insurance policy is considered a business expenditure. Therefore, the taxable profits of the business organisation are reduced, which in turn reduces its tax* liability.
  
  

• Retention of people

  Keyman policy helps boost the morale of the people, as they feel that they are important to the business. This sense of belonging leads to higher productivity and improves the business's workings.
  
  

• Stability in the price of shares

  A keyman policy helps keep the price of a business organisation's shares stable. The death of a keyman can lead to a drop in the business organisation's share prices, but investors can be assured that the financial losses can be covered through the sum assured.
  
  

• Valuation of a business organisation

  If the business organisation is being acquired, having insurance improves its valuation. The buyers will have the assurance that they have a backup in the form of insurance to meet the expenses of the replacement of the key person.
  

Keyman Insurance Policy Tax* Treatment

• Premium paid by the business organisation

  Companies can treat the premium paid as a business expense and claim tax deductions under Section 37(1) of the Income Tax Act, 1961. This can help reduce the business organisation's tax liability.
  
  

• Death Benefits that the business organisation receives

  If the key person dies, then the business organisation receives the death benefit. This amount is treated as business profits under Section 28(vi) of the Income Tax Act 1961.

How Does A Keyman Insurance Policy Work?

In a keyman insurance policy, the employer is the proposer who pays the premium, and the key person is the life insured. The keyman can be any person who holds a significant position in the business organisation's growth or has a specified skillset.
 

In case of the unexpected death of the keyman, the employer will receive the death benefit. The unexpected demise of the keyman can incur losses to the business organisation in two ways: profit reduction and costs for replacing the key person.
 

The death benefit from the keyman insurance policy can be used to tackle the financial inconsistencies in the absence of the key person or recruit a new executive. However, if the life insured survives the policy term, no benefit is paid.

Things to Remember About Keyman Life Insurance

Here are some of the important things that you need to remember about the keyman policy:
 

• The keyman insurance policy is a pure term plan without return of premium and without any riders^#.

• No loans can be availed against keyman insurance plans.

• The key person is not required to pay any premium towards the plan, and they will also not receive any death benefits under the plan.

Conclusion

A keyman insurance policy protects the business financially if the key person of the business organisation dies. Though the business organisation cannot replace the skills and expertise of the key person with the policy, it can help the business organisation deal with the loss and find a replacement for the person. Therefore, keyman insurance is important, and it should be purchased after a careful assessment of your business needs.