In InsuranceSamadhan.com’s A-Z Blog series on Insurance topics, we try to provide all vital information related to the Insurance sector and demystify certain myths related to the sector. In today’s blog, we are sharing detailed information regarding – Keyman Insurance Policy – and everything that one needs to know.
Life Insurance on main earning members secures family future income in case of untimely demise of earning member. However same untimely demise can jeopardize a running business if the continuity of business is dependent on contribution of this person.
So future of family as well as business can be ensured through timely insurance of main person or persons. In business houses, this person is called Key Person and a business house has insurable interest on this key employee.
Ashok Private Limited was a software development company and they hired Manish and Ajay on very high salary and sent them to USA for a specialized training on Artificial Intelligence. Total money spent on them exceeded over Rs 5 Crore.
Manish died in an road accident causing major financial loss to Ashok Pvt Ltd because many clients threatened to leave who were working with Manish.
Luckily accountant of Ashok Pvt Ltd and had opted for Key man insurance on life of Manish and received Rs 5 crore on death of Manish. Ashok Private Limited paid ex gratia payment of Rs 2 crore to family of Manish and kept Rs 3 Crore as reserves for loss compensation.
What is Keyman Insurance?
It is a provision allowed under law that an Employer can insure its key employee to protect business interest of firm in case of death of insured employee.
The keyman can be decided on the basis of its importance in business running like having a specialized skill or designation etc. Keyman Insurance is a concept under which a policy is taken.
Which plan can be sold under Keyman Insurance?
Only a Term Insurance can be sold under Keyman Insurance. Earlier Saving linked Policy was sold but it has been stopped.
Which type of firms can buy Keyman Insurance?
- Public Limited and Private Limited Firms on key employees who are having less than 51% shares and key person along with family can not hold more than 70% share.
- Partnership Firms can have Partnership Insurance on all partners.
- Proprietary firms on key employees, firm can not take keyman on proprietor.
Sum assured under Keyman Insurance Policy
It should be justified on the basis of 10 times of annual income or 3 times of gross profit and 5 times of net profit.
However any amount is possible if it can be justified eg a new firm can also go for keyman or a loss making firm can also plan keyman.
Taxation of Keyman Insurance Policy:
All paid premiums are treated as business expense under section 37.
All claims are treated as income in books of the firm however firm can give an exgratia payment to the family of deceased. So it nullifies the impact on income of firm and exgratia payment on death is tax free in hand of family.
Documents Required for Keyman Insurance Policy:
- Memorandum and Balance Sheet of the firm.
- 3 years ITR of firm and insured.
- Board Resolution of firm seeking keyman insurance with clarity on how death claim will be treated.
- Keyman questionnaire justifying sum assured.
So Keyman Insurance should be opted by all business houses for efficient risk management.
If you are facing any issue related to Keyman Insurance Policy, you must reach Insurance Samadhan who has experts team to guide you. We shall be pleased to support your case on technical and legal grounds.
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