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:

Typical examples of Keyman

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:

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:

Plans Allowed:

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

Tax Benefits of Keyman Insurance

How is KMI a bonanza for corporate Sector?