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Keyman Life Insurance


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    What is Keyman Life Insurance ?

    Keyman can be an employee of an organization or a partnership firm or any proprietorship company who plays an important role in the functioning of the organization. There can be more than one keyman in an organization without whom the business would be affected for a certain period of time. Have you ever thought of the consequences that could arise due to the sudden demise of the keyman of your organization? Well, there could be direct and indirect losses to your organization in the form of monetary loss, business loss etc. But the most important thing for any organization to function is money and if the keyman’s demise results in loss of money then this is where the organization needs to think of a solution.

    The solution to this problem is “Keyman insurance policy” which helps in financially securing your business in case of sudden demise of the keyman of your organization. Keyman insurance is a form of term life insurance which is given to the key personnel of an organization. The keyman of any organization would be the major contributor towards the success of the organization and can directly influence the most important thing for any organization i.e. profits. So, in short keyman life insurance covers the life of key personnel of an organization in return for a considerable amount known as premium. In case of sudden demise of the keyman the sum assured or the claim proceedings would be paid to the organization which would generally be enough to run the organization in the absence of the key personnel.

    Keyman insurance is not a separate insurance but an application of term life insurance for a specific need. Keyman includes women as well and there can be more than one keyman in an organization. The main objective of keyman insurance is to cover the life of a keyman for a certain monetary amount so that in case of death of the keyman, the amount would be paid to the organization.

    Who can be the keyman?

    Keyman as mentioned above is an employee of an organization without whom the business would suffer to a certain extent. Keyman for an organization could be any of the below:-

    • CEO
    • COO
    • CMO
    • Partner in family business
    • Chief Executives
    • Full time Directors
    • Working partner
    • Managing Director
    • Senior Scientist
    • Product specialist
    • Any employee with a specialized skill set

    The keyman of any organization would be decided by the organization depending on the needs and requirements of the organization. For instance any employee working on an important project without whom the project would come to a halt can be considered as a keyman. Keyman life insurance can be offered to such employees considering the value and their need for the organization. The most important thing is that the keyman insurance can even be taken by the partners of a family business where the sudden demise of any keyman can result in loss to the organization.

    Eligibility to take Keyman life insurance?

    The eligibility to take keyman life insurance is as mentioned below


    • Should be an on-roll or contract employee of the organization.
    • Man or Women employees of the organization are eligible to avail the keyman insurance.
    • Any employee with specialized skills is eligible under the keyman insurance
    • Should hold a key position in the organization
    • Eligible only till the retirement age for on-roll employees and contract period for contract employees.
    • Sole proprietor and partner of an organization would not be considered as an employee, and hence, any policy bought on their lives would not be a keyman policy.
    • Only term life insurance can be taken as a keyman insurance policy.
    • The keyman should hold less than 51% shares in the organization.
    • The total number of shares held in the company by the keyman and his/her family should not exceed 70% of the company’s total shares.
    • There should be some relative proof submitted by the company to the insurance company to prove that the keyman has to play an important role in the organization.
    • Loss making organizations cannot purchase keyman insurance policy.
    • Keyman insurance would not be normally issued if a company’s profit or turnover is declining for the past three years.

    Features of KeyMan Life Insurance policy

    Keyman life insurance policy has certain distinctive features making it the most sought policy for business in India. The features


    Keyman can be decided by the organization

    The main feature of keyman life insurance is that the organization can decide on whom to make the keyman. It is the wish of the organization to decide the keyman to ensure under the keyman insurance policy. Different organizations have different approaches to decide the keyman for their organizations. This facility to decide the keyman in the organization for keyman insurance is a boon to the organizations as well as the family businesses.

    Lump Sum claim amount

    The other feature of keyman insurance is that the claim amount would be paid in lump sum which can be utilized by the organization to cover the losses as a result of demise of the keyman.

    Nomination

    The other feature of keyman insurance is that the nomination of keyman insurance policy can be done only in the name of the organization which is taking the keyman insurance policy. Even Though the keyman insurance is a type of term insurance policy, the nomination in keyman insurance can only be done in the name of the organization thus making the organization beneficial. The premium would be paid by the organization and the claim would be taken by the organization.

    No restriction on the number of keymen

    The important feature of the keyman insurance is that there would be no restriction on the number of employees that can be covered under the keyman insurance. There would be no restriction on the number of employees to be covered under the keyman insurance policy.

    How is sum assured calculated in keyman insurance?

    The sum assured under keyman insurance is very important and it cannot be unlimited. This sum assured would be paid in lump sum amount in case of sudden demise of keyman. In this way the organization would have sufficient time and money to recruit and train another keyman to get the job done.

    The sum assured under keyman would be limited to

    Ten times of the keyman’s annual package

    Three times the average gross profit of the organization for the past three years.

    Five times the average net profit of an organization for the last three years.

    Advantages of Keyman life insurance

    There are many advantages with keyman insurance policy for the organizations which are mentioned below


    Lump Sum Amount

    The major advantage of keyman life insurance is the lump sum amount that is payable in case of sudden demise of the keyman. This lump sum amount can be used to recruit and train a new keyman in place of the demised keyman. The business continuity can be ensured with the lumpsum amount without much hiccups in case of sudden demise of the keyman.

    Sense of belonging

    The keyman insurance gives a sense of belonging to the employees in the organization. It means their work is being recognised by the organization. The skills employees bring to the organization are valued by the organization by taking the keyman insurance policy.

    Income tax exemption

    The other advantage of keyman insurance policy is that organizations can avail income tax exemption by showing the premium paid by the organization as business expenditure and enjoy tax benefits under the section 37(1) of income tax act. The claim proceedings from the keyman insurance are taxable as business income. Since the premium is paid by the organization there would be no income tax exemption given to the keyman for the premium paid under the income tax act.

    Loan repayment guarantee

    The keyman insurance policy acts as a loan repayment guarantee to the organization. In case of death of the keyman the claim proceedings can be used to repay the loan taken by the organization or the keyman. For instance the loans taken by family businesses can be repaid from the claim proceedings of the keyman insurance policy. The keyman insurance policy acts as a loan repayment guarantee scheme for the organizations.

    Can ULIP & Endowment policies be sold as Keyman insurance ?

    Keyman can be an employee of an organization or a partnership firm or any proprietorship company who plays an important role in the functioning of the organization. There can be more than one keyman in an organization without whom the business would be affected for a certain period of time. Have you ever thought of the consequences that could arise due to the sudden demise of the keyman of your organization? Well, there could be direct and indirect losses to your organization in the form of monetary loss, business loss etc. But the most important thing for any organization to function is money and if the keyman’s demise results in loss of money then this is where the organization needs to think of a solution.

    Term insurance vs KeyMan insurance



    Item

    Term Life Insurance

    Keyman Insurance

    DefinitionTerm life insurance also known as pure term insurance, guarantees a certain fixed amount in case of death of the policyholder. Keyman insurance is a form of term insurance that guarantees a fixed amount to the organization in case of death of a keyman.
    Entry Age The entry age for term life insurance is:
    Minimum: 18 years
    Maximum: 65 years
    The entry age for keyman insurance is above 18 years and the term would be till retirement or till the completion of contract of the keyman.
    Term The term of the policy would be the entry age minus 85 years. The term of the keyman insurance would be till the completion of contract of contract employee or till the retirement of on-roll employee.
    Eligibility Any person earning income with sufficient proof is eligible to take term insurance.Any person of the organization holding key skills is eligible for the keyman insurance.
    Sum Assured The sum assured under term insurance would be 25-30 times the annual compensation of the employee. The sum assured under the keyman insurance is:
    • Ten times the annual package of keyman.
    • Three times the average gross profit of the organization for the last three years.
    • 5 times the average net profit of the organization for the last three years.
    Coverage The term insurance policy covers the sudden demise of the insured. The claim proceedings would be paid to the nominee or legal heir of the insured.The keyman insurance policy covers the sudden demise of the keyman. The claim proceedings would be payable to the organization.
    Pre policy Check-up There would be pre policy checkup depending on the underwriting criteria of any organization.There would be pre policy checkup depending on the underwriting criteria of any organization.
    Proposer The proposer can either be the insured or a person with legal liability to the life insured. The proposer in this case would be the organization taking the keyman insurance policy.
    Premium payerThe premium of term insurance would be paid either by the insured or the proposer.The premium of keyman insurance would be paid by the organization.
    Claim proceedings The claim proceedings in term life insurance policy would be given to the nominee or legal heir of the life assured. The claim proceedings in the keyman insurance will be paid to the organization which are taxable under the income tax act.
    Income tax exemptions The life assured can claim income tax deductions upto Rs.1.5 Lakh under the Section 80D of the income tax act. The organization can claim income tax benefits by showing the premium paid as a business expense.

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