Keyman Insurance- Should You Buy It ?

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Understanding Keyman Insurance

Keyman Insurance, as an insurance objective, is presented to business houses as a Risk Management tool to compensate for losses in the event of the untimely death of key employees. Every business house pays a premium to insure its assets, goods in transit, cash, etc., but questions arise when it comes to insuring human assets that manage these resources. Through this blog, let us understand keyman insurance

1. Who can buy: Any corporate entity, i.e., Public limited / Private limited / Partnership firm, for its employees / Proprietor for its employees.

2. Who can be insured: Key employees who contribute to organizational success through skills, education, or position. Employees should be insurable, and there must be reasons to believe that firms would suffer a loss in case of the insured’s death. Insurance companies ask for justification of the sum assured.

3. Which product can be bought: Under keyman insurance, only term insurance is allowed, meaning money is paid out only in the event of death, with no benefits for survival.

4. How the form is filled: The firm proposes insurance on the life of the employee. All details of the firm and employee are submitted. The firm must justify the sum assured.

5. Documents to be submitted: Article of association, Board Resolution specifying the name of the employee / sum assured / premium / time period / purpose, Balance Sheet of three years, ITR of Employee for three years, Keyman questionnaire

6. How the premium is treated: Premium is treated as a business expense, like any premium paid for assets.

7. How the claim is treated: The claim is treated as business income, but the firm can make an ex-gratia payment to the nominee if specified in the board resolution.

8. Benefits: Perpetuity of business, Compensation to the nominee does not affect working capital, Business expense, Employee satisfaction, The policy can be assigned to an employee if they leave the organization.

9. Higher sum assured: Insurance companies allow only a limited cover based on the ITR of the employee, but the employee can buy a higher cover through Keyman insurance.

10. Problems: Keyman insurance needs to be purchased after understanding the full concept. Few people understand the entire concept and documentation. It should be bought and continued by paying renewal premiums on time. Mostly, premiums are not paid on time, leading to policy lapses.

11. Can we add riders: Yes, accidental death, disability, and critical illness can be added, but avoid options like Return of Premium, which may be disallowed by Income tax laws.

Keyman insurance should be an integral part of all business management. Check your keyman insurance whenever you are taking a business loan. Increase the sum assured as per the business’s requirements.