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What is Key Man Insurance Policy?

What is Keyman Insurance?

In today’s world of professional management success of a company solely depends on the Individual Talents of certain Managers, whose Vision, Skill, Integrity and Managerial capability is essential for the future progress and prosperity of the company.

Exit of these key persons due to premature death would in most cases result in immediate financial loss to the company and question arises, how does a company replace talent like that?

The company on the lives of such Key Persons purchases Keyman Insurance and in event of premature death of Key Person Company gets the insurance proceeds.

Keyman Insurance Proceeds will cover:

  • The loss of sales attracted by his/her ability and personality.
  • The loss due to his/her day to day specialized skills.
  • The cost of Recruiting and Training a suitable replacement.
  • The cost of delay or cancellation of any project upon which he/she is working.
  • The loss of opportunities for future expansion.
  • The loss of stable Management and good labor Relations.
  • The Reduction of Credit Standing of the company due to:
    • The loss of sales attracted by his/her ability and personality.
    • The loss due to his/her day to day specialized skills.
    • The cost of Recruiting and Training a suitable replacement.
    • The cost of delay or cancellation of any project upon which he/she is working.

Typical examples of Keyman

  • Managing Director/CEO
  • Financial Director
  • Sales Director
  • Project Manager
  • Inventor
  • E-commerce manager etc

Eligibility of companies:

Keyman insurance is open to all categories of business firms except:

  1. Managing Director/CEO
  2. Financial Director
  3. Sales Director
  4. Project Manager
  5. Inventor
  6. E-commerce manager etc

How the amount of Insurance is arrived at?

  1. Directors of Public limited company, Private limited Company with at least 10 employees and Partners of Partnership firm
    1. Multiple of Keyman’s Compensation Package:

      The Insurance will be limited to 10 times of Keyman’s compensation package including perks. (The notional value of the perks can be taken as 30% of the gross annual salary).

    2. Gross profit method:

      The Insurance will be limited to 2-times of average Gross profit for last 3-years (before depreciation and taxation).

    3. Net profit method:

      The Insurance will be limited to 5-times of average net profit for last 3-years (after depreciation and taxation).

    The Maximum insurance allowed will be restricted to least of the amounts arrived at by above three methods and distributed among all the key persons proposed for. There is no restriction on turnover of partnership firm.

  2. Private limited Company with less than 10 shareholders/employees

    Maximum keyman insurance allowed will be restricted to 3 times of average net profit of last 3 years.

  3. Companies where 3 years P/L accounts are not available:

    Companies having 2 years P/L account:

    Maximum keyman insurance allowed will be restricted to 2 times of average net profit of last 2 years.

    Companies having 1 year’s P/L account:

    Maximum keyman insurance allowed will be restricted to equal to net profit of one year.

  4. Keyman Insurance to Employees of Public limited/ Private limited/Partnership/ Proprietary firms:

    Keyman insurance to employees of above firms will be restricted to 10 times the salary for the latest financial year as reflected in Form No.16. The firm should be profit making one and the profits for the last three years should justify the cover being allowed. (3 times of average gross profits or 5 times of average net profits, whichever is lower).

  5. Key Man Insurance on the Basis of Loan Liability:

    Key man insurance is also considered on the basis of loan liability of the company. If the company has taken a loan from a bank/financial institution, KMI to the extent of 2/3 of the loan can be considered on the life of its Directors, since the repayment of loan is dependant upon the profitability of the company, which to a great extent depends on the Directors. For example, if a company with 3 Directors has raised a loan of Rs. 1.00 crore, S.A. of Rs. 22 lac under KMI can be considered on the life of each Director, in general.

The following requirements, apart from usual requirements, must be submitted:

  • Copy of Project Report / viability report submitted with application for loan and agreement regarding the terms and condition of loan.
  • Letter regarding sanction of loan. Proof of loan having been availed of Further,
  • Term of the policy shall not exceed the repayment term for the Loan.
  • The company should be capable of paying the premium. However, quantum of S.A. will not be restricted to 3 times / 5 times of profit as described earlier.
  • Credentials of the company should justify acceptance of the KMI.

Requirements for Key man Insurance proposal (for companies):

  1. Copy of Memorandum & Articles of Association.
  2. Copies of Audited Balance Sheets and Profit & Loss A/cs for preceding 3 years.
  3. Certified true copy of Board Resolution passed in the meeting of Board of Directors containing following information :-
    • Sum Assured desired.
    • Name & signature of the person who is authorized to complete proposal papers.
    • The use of seal of the company.
  4. Keyman Questionnaire (to be completed in the prescribed format and the same is to signed by the authorized person under the seal of the company).
  5. Copies of I.T. Returns of the company for preceding three years.
  6. Consent for the endorsement for assignment/surrender to be placed on the policy.
  7. Proposal Form No. 340 and usual medical requirements (as applicable to individuals) for Key man.
  8. In case of employees: Proof of keyman’s salary/ copy of employment contract/Individual ITR’s/ Form 16 for last 3 years or less as applicable.

Requirements for Key Man Insurance under Partnership Firm:

  • Proposal Form in F.No. 340 and usual medical requirements on the life of the Key - man Partner.
  • Copy of Deed of Partnership duly attested by the partner authorized to sign insurance proposal along with copy of supplementary Partnership Deed.
  • Copies of Audited Balance Sheet and Profit & Loss A/Cs for the last three years containing schedule of partner’s capital A/cs.
  • Copies of Income Tax Returns of the firm for preceding three years duly attested by the authorized partner.
  • Letter of Authority in favour of partner signing the proposal.

Plans Allowed:

Plan 822- Anmol Jeevan II, and Plan 823- Amulya Jeevan-II.

Tax Benefits of Keyman Insurance

  • Premiums paid by company qualify as eligible business expenses under Sec.37 (1) of the Income Tax Act.
  • Premiums paid by the company are not a perquisite in the hands of the Keyman.
  • The Maturity/Death claim amount received by the company will be added to the business income of the company in the year of receipt.
  • On retirement/premature resignation of Keyman, the company has following choices:-
    1. It can surrender the policy.
    2. It can assign the policy to Keyman, as policy has no surrender value.

How is KMI a bonanza for corporate Sector?

  • The company is protected against the financial loss in the event of Keyman’s death.
  • The company is able to create an asset for itself in the form of Sum assured and guaranteed/loyalty additions.
  • It gives a substantial relief to the company in Income Tax.
  • It protects the interest of other employees, shareholders and customers.
  • It keeps the company’s position stabilized in the market.
  • It generates confidence, sense of security and loyalty in the minds of Keyman.
  • It can be given as security to Bankers even though policy is not allowed to be assigned.
  • It is a guarantee to the creditors.

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