Keyman Insurance: Meaning, Benefits, and How It Works

Key Takeaways
 

• Keyman insurance is specifically for the important employees of the businesses whose absence  can affect them badly. 
   
• According to the IRDAI, keyman insurance works under Section 37(1) of the Income Tax Act. 
   
• The premium of keyman insurance is determined by the period and risk. 

Bonus point - Now, any amount received from a keyman insurance policy is taxable under section 10(10D). 

Life insurance is important for any person. In an insurable interest, only those who are financially and emotionally dependent on that person can buy insurance. After the death of that specific person, the company compensates the family. Not the whole family, but the close ones like spouses and children who were financially dependent on that person. Keyman insurance is also a type of life insurance. 

Suppose there is a company, and the founder is a very important person for the business. Almost all the work, deals, and operations are done by the founder. One day unexpectedly, he met with an accident and was killed in that. The loss was big, but his family claimed insurance. Also, his business company opted for Keyman insurance. Now, the company will pay for the loss of business.

What is the Purpose of a Keyman Insurance Policy

Keyman insurance is a type of life insurance. When a person who is very important for business, like the CEO, founder, or other main employees on whom the company relies for operation, dies, it faces many challenges. And if they are not present, the company can bear a loss, for these persons, keyman insurance was introduced. When that important person dies, the insurance company pays the business. 

Keyman insurance is important because, after the death of that specific person, business operations are more likely to be disrupted, but keyman insurance provides funds. It saves businesses from financial instability and helps in continuity. Keyman insurance is not applicable to any employee. It is for specific main persons with skills, crucial knowledge, or significant leadership roles, like directors, CEO, or project managers. This policy automatically ends when the person leaves the company.

What is the purpose of a keyman insurance policy?

Keyman insurance is for those persons who serve a business and play a very important role in its growth. When an important person in business does, it badly affects that business as he/she is financial protection to that person. This fund can be used in the hiring and training process. In many businesses that an important employee acts as a guarantor for business loans, in this case, if he dies, the loan can be recalled, which affects the credit rating. Here, the business can use the funds. Also, having a policy can ensure investors that the company can bear the loss of an important leader.

Types of Keyman Insurance Policies

The type of keyman insurance depends on the time period of the policy and the risk covered.

Life Insurance - This is a common insurance. If an important person passes away during the time period of the policy, the insurance company pays a lump sum to the business.

Disability Insurance - In this type of insurance, if the key person falls sick, is injured, or loses the ability to work permanently, the company pays to the business. 

Structure and Duration - keyman insurance can be bought according to the duration of the policy, like 10, 20, 30 years. According to the keyman, insurance is pure term insurance, which has no maturity, survival benefits, or riders. If someone wants lifelong keyman insurance, the premiums are most expensive. 

Keyman Insurance Policy Premium Calculator

There is no specific formula or calculator that calculates the keyman insurance policy premium. When businesses want to go for keyman insurance, the insurance company first checks the performance of the company. It focuses on coverage amount. The company sees Gross Profit, Net Profit, and the salary of a person. 

After checking the sum, the company will observe the age and health condition of that employee, the time period of policy, the type of insurance, and if the job involves high risk or not.

Then, the company calculates the tax impact. In India, keyman insurance expenses come under Section 37(1) of the Income Tax Act. So the company claims a tax deduction on the premium paid by the business. 

Benefits and Limitations of Keyman Insurance

Keyman insurance provides funds to the business if that insured person dies or  is disabled from working. Here are some benefits and limitations of keyman insurance.
 

1. Keyman insurance provides funds to the company to continue their routine operations in the absence of that important person. 
2. This fund covers the cost of hiring, training and acquisition of new talent in the company.
3. The premium that the business pays is a tax-deductible expense.
4. After ensuring, high-value employees may feel valuable in the company.

Limitations
 

1. There is no maturity in keyman insurance. If an insured employee survives the policy terms, then there is no return.
2. That employee who is getting insured is required to have less than 51% of stock in the company.
3. In keyman insurance coverage is not enough. It may not cover the whole loss of the company.
4. The premium of insurance is deductible, but the amount the business receives after the death of that person is taxable.
5. One more drawback of keyman insurance is that it does not cover suicide.

This insurance has both benefits and some risks. Before getting into this you should have an idea about both sides. 

Conclusion 

Companies have many employees and senior staff like the founder, Direct, and CEO. Employees only follow the instructions and do their work. But the main work is done by seniors. They frame guidelines, make strategies to grow, and handle important work.

In case these employees die, the organisation can't grow and can stop working smoothly. It may face difficulties. In this case keyman insurance helps companies. Keyman insurance has both positive and negative sides, companies have to decide when to buy it and for whom.

FAQs 
 

What is keyman insurance, and why do companies buy it?

Keyman insurance is similar to life insurance: businesses buy it for very important employees. Like founder, CEO, director, executive, etc. It works as a safety for the business, after the death of an important employee, the insurance company pays the business, hence companies buy it.

Is keyman insurance tax-deductible for businesses?

Yes, keyman insurance is tax-deductible as a business expense under Section 37(1) of the Income Tax Act. And payment after the death of an employee is taxable.

Do startups really need keyman insurance? 

Not mandatory, but keyman insurance is considered essential for startups. It helps in getting funding from banks. Startups depend on specific employees, so the loss of leadership is non-negotiable so keyman insurance becomes very important.

How much coverage should a company take for a key employee? 

Keyman insurance coverage age is normally 10 times of the key employee's salary.