Keyman Insurance
Keyman Insurance protects a business from financial losses due to the death or disability of a vital employee crucial to success.
- Financial Protection
- Talent Retention
- Attract Investors
What is Keyman Insurance?
Keyman Insurance, also known as Key Person Insurance, is a policy that a company purchases on the life of a key employee. The objective is to protect the business against financial losses that could result from the death or disability of a key person who is critical to the company’s success.
Overview of Keyman Insurance
Keyman Insurance is purchased by employers to safeguard their company against financial losses due to the death of their key employees. It can be seen as a simple term life insurance that covers the life of key persons of the company; however, the insurance proceeds go to the employer.
Why Buy Keyman Insurance?
Financial Protection
Provides financial security to the business by covering potential losses due to the absence of a key person.
Talent Retention
Helps in retaining top talent by showing employees their value to the company.
Attract Investors
Demonstrates to investors and banks that the company is well-prepared for unexpected losses, making the business a more secure investment.
Cover Financial Strain
Covers financial losses due to the untimely death of key employees of the company, helping manage any loss of profit or debt due to their absence.
Who is key Person in the KeyMan Insurance Policy ?
Directors of Company
Directors of a company
Key sales people
Key sales people
Key Project Managers
Key project managers
Employees with specific skills
Employees with specific skills
Who is key Person in the KeyMan Insurance Policy ?
Directors of Company
Directors of a company
Key sales people
Key sales people
Key Project Managers
Key project managers
Employees with specific skills
Employees with specific skills
Keyman Insurance Policy - Inclusions
A Keyman Insurance Policy is designed to protect a business from financial loss if a key employee, founder, or director unexpectedly dies or becomes disabled. Understanding the inclusions of a Keyman Policy helps companies know exactly what benefits they can rely on during critical moments.
Major inclusions covered under a Keyman Insurance Policy:
Death Benefit Coverage
If the insured key employee passes away, the company receives a lump sum payout. This benefit helps the business manage financial instability, repay debts, and cover operational losses caused by the sudden absence of the key person.
Permanent or Total Disability Coverage
Keyman Insurance covers situations where the insured becomes permanently disabled due to illness or an accident. The benefit amount helps the company deal with lost revenue, replacement hiring, and training expenses.
Critical Illness Protection
Many Keyman Insurance plans include coverage for major critical illnesses such as cancer, heart attack, stroke, kidney failure, or major organ transplant. This ensures the business stays financially stable if a key employee becomes critically ill.
Income Protection for Business Losses
The policy compensates the business for potential loss of income caused by the absence of a key individual who contributes significantly to sales, strategy, or operational decisions.
Replacement & Recruitment Costs
A sudden loss of a vital person can disrupt operations. Keyman Insurance helps cover the cost of recruiting, training, and onboarding a new employee to fill the role quickly.
Loan & Debt Protection
If the company has ongoing business loans guaranteed or backed by the key employee, the policy payout can be used to repay outstanding debts and maintain the organization’s financial credibility.
Temporary Disablement Coverage (Optional)
Some insurers offer additional coverage for temporary disablement, where the key employee becomes unable to work for a short period. This helps the company manage short-term revenue loss.
Business Continuity Support
The policy funds can be used for maintaining cash flow, stabilizing operations, supporting business recovery, and preventing financial setbacks during the transition period.
Keyman Insurance Policy - Exclusions
While Keyman Insurance provides extensive protection, certain scenarios are not covered. Understanding these exclusions helps businesses set realistic expectations.
Suicide or Self-Inflicted Injuries
Death or disability caused by intentional self-harm or suicide (within the policy’s exclusion period) is not covered.
Death Due to War, Terrorism, or Natural Disasters
Any loss resulting from war, terrorism, riots, or large-scale natural calamities may be excluded depending on the insurer’s guidelines.
Pre-Existing Diseases
Claims arising from diseases or health conditions that existed before the policy start date may not be covered, unless the insurer has specifically approved it.
Criminal or Illegal Activities
Death or disability occurring while the key person is involved in unlawful activities is excluded from coverage.
Participation in Hazardous Activities
High-risk activities such as adventure sports, aviation (other than as a passenger), or dangerous occupations are generally excluded.
Substance Abuse
Claims related to injuries or death due to alcohol, drugs, or intoxicants are typically excluded.
Non-Disclosure of Information
If incorrect or incomplete information is provided during policy issuance, the insurer may reject the claim.
Coverage Amount Determination
The sum insured (coverage amount) is restricted to either of the following conditions
- 10 times the annual gross salary of the key employee
- 3 times the average annual gross profit of the company for the last three years
- 5 times the average annual net profit of the company for the last three years
Features of Keyman Insurance
Bereavement Benefit
The company receives a sum equivalent to the insured amount in case of the key person's death.
Succession Planning
Provides financial support for hiring new talent or training an existing employee as a replacement.
Debt Management
Helps manage any loss of profit or debt due to the key person's absence.
Business Assurance
Can be used as collateral for business loans and supports business continuity plans.
Tax Benefits of Keyman Insurance
Premiums paid for Keyman Insurance are considered a business expense and are deductible under Section 37(1) of the Income Tax Act. However, claim proceeds are taxable as business income.
Since neither the premium is paid by the employees nor the proceeds come to them, there are no tax implications for these members under this insurance.
Keyman Insurance Claim Process
Policy Ownership
The business entity is the proposer, and the key person is the life insured.
Premium Payment
Premiums are paid by the business.
Claim Settlement
In case of the key person’s death, the business gets the sum assured without needing to provide evidence of losses or expenses after the key employee's death.
Handling Policy if Key Employees Leave
Policy Lapse
The company may choose to stop paying the premium and let the policy lapse.
Transfer to New Employer
The policy may be transferred to the new employer on mutually agreed terms.
Policy Assignment to Employee
The policy may be assigned to the key employee with mutual consent.
Handling Policy if Key Employees Leave
Policy Lapse
The company may choose to stop paying the premium and let the policy lapse.
Transfer to New Employer
The policy may be transferred to the new employer on mutually agreed terms.
Policy Assignment to Employee
The policy may be assigned to the key employee with mutual consent.
Documents Required for Keyman Insurance
- Application form signed by the insured and authorized company representative.
- Age proof of the insured.
- Board resolution for the purchase of Keyman Insurance.
- Financial statements including P&L accounts and balance sheets for the last 3 years.
- KYC documents of the company and the insured.
- Personal ITRs of the Keyman for the last 3 years.
- Memorandum of Association & Articles of Association/Partnership deed.
- Detailed resume of the Keyman.
At What Stage Should a Company Decide to Take Keyman Insurance?
Startup Phase
Securing Investment: Provides assurance to investors. Key Personnel Dependency: Insures crucial individuals.
Growth Phase
Expansion: Protects key individuals essential for growth. New Projects: Mitigates risks associated with new ventures.
Maturity Phase
Leadership Changes: Ensures smooth transitions. Maintaining Stability: Safeguards against disruptions.
Debt and Financing
Securing Loans: Often required by financial institutions. Bond Issuance: Enhances investor confidence.
Partnerships and Mergers
Strategic Alliances: Ensures continuity during transitions. Valuation: Assists in determining company value.
Tax Planning
Utilizing Tax Benefits: Leverages tax deductions on premiums.
Operational Risk Management
Risk Mitigation: Essential for companies reliant on key individuals.
Can a Company Decide to Give Proceeds from Keyman Insurance to the Deceased's Family?
The company can voluntarily choose to use the insurance payout to support the deceased employee’s family. This can be seen as a goodwill gesture and can help maintain morale among other employees.
Some Keyman Insurance policies can be structured to include a benefit for the family of the deceased. This would need to be specified when setting up the policy.
The company can have an internal policy or agreement in place stating that a portion or all of the proceeds will go to the family in case of the key person’s death.
Including such a provision in the employee’s benefit package can enhance the attractiveness of the employment offer and demonstrate the company’s commitment to its employees’ welfare.
It’s important to consider the legal and tax implications of transferring insurance proceeds to the family. Consulting with legal and tax advisors is recommended to ensure compliance with relevant laws and regulations.
In summary, while the primary purpose of Keyman Insurance is to protect the business, companies have the discretion to use the proceeds to support the family of the deceased employee. This can be structured in various ways to balance business protection and employee welfare.
How is the Premium for Keyman Insurance Determined?
Age of the Key Person
Younger individuals generally have lower premiums.
Health Condition
Good health results in lower premiums; medical examinations are required.
Occupation and Role
Higher-risk roles may attract higher premiums.
Sum Assured
Higher coverage amounts result in higher premiums.
Term of the Policy
The duration of the policy affects the premium structure.
Company Financials
Strong financial health of the company can lead to favorable premium rates.
Coverage Amount Formula
Based on 10 times the annual gross salary, 3 times the average annual gross profit, or 5 times the average annual net profit, with the lowest value typically taken.
Additional Riders
Adding supplementary benefits increases the premium.
Age of the Key Person
Younger individuals generally have lower premiums.
Health Condition
Good health results in lower premiums; medical examinations are required.
Occupation and Role
Higher-risk roles may attract higher premiums.
Sum Assured
Higher coverage amounts result in higher premiums.
Term of the Policy
The duration of the policy affects the premium structure.
Company Financials
Strong financial health of the company can lead to favorable premium rates.
Coverage Amount Formula
Based on 10 times the annual gross salary, 3 times the average annual gross profit, or 5 times the average annual net profit, with the lowest value typically taken.
Additional Riders
Adding supplementary benefits increases the premium.
Smoking Status
Non-smokers pay lower premiums compared to smokers.
Underwriting Factors
Each insurance company has its own risk assessment procedures.
What is the Term of Keyman Insurance?
The term of Keyman Insurance typically ranges from 1 to 15 years, depending on the agreement between the company and the insurer. Many policies offer renewal options. The term should align with the key person’s role and the company’s strategic plans.
How Should a Group Decide the Term of Keyman Insurance?
Assess Key Person’s Role
Determine the critical duration of their contribution.
Align with Business Objectives
Match the term with long-term goals.
Evaluate Financial Stability
Choose a term that fits financial health.
Plan for Succession
Ensure the term covers transition periods.
Consult Advisors
Seek professional advice.
Review Renewal Options
Opt for flexibility in renewal.
Consider Age and Health
Factor in key person’s age and health.
Cost-Benefit Analysis
Ensure premiums fit the budget.
Assess Key Person’s Role
Determine the critical duration of their contribution.
Align with Business Objectives
Match the term with long-term goals.
Evaluate Financial Stability
Choose a term that fits financial health.
Plan for Succession
Ensure the term covers transition periods.
Consult Advisors
Seek professional advice.
Review Renewal Options
Opt for flexibility in renewal.
Consider Age and Health
Factor in key person’s age and health.
Cost-Benefit Analysis
Ensure premiums fit the budget.
Frequently Asked Questions
Protect Your Business, Secure Your Key Players
Safeguard your business from financial setbacks with Go Insure India’s Keyman Insurance. Designed for crucial employees and executives, this policy ensures continuity by providing financial support in case of unexpected loss, keeping your company’s future secure.