- Keyman insurance is a great financial recourse for companies when they lose a key functionary.
- It gives many benefits such as reduced taxable income, availability of needed funds and even boosting the morale of the keyman himself
Many of the businesses in India are privately owned; which means that there are single or multiple members of a particular family who control the functioning of the whole business. These individuals are the face of the company, to the general public and to the investors as well. They are the ones who hold sway over most of the critical decisions taken in the company, and also define its future trajectory.
If something were to happen to them, it would have an impact not only on the family but the business as well. This is where keyman insurance comes in. It is a policy that is similar to term insurance, but for businesses. It helps the business emerge from the loss of one of its key functionaries.
A ‘keyman insurance’ is essentially a cover, the payout from which helps a business recover from the loss of a valuable asset such as its owner, partner, CEO, GM, or any employee the company considers to be an integral part of its functioning.
Definition of Keyman Insurance
Keyman insurance can be defined as an insurance policy where the proposer is a company, the premium is paid by the company, the claim also goes to the company, but the insured is an employee. This employee discharges significant responsibilities, contributes immensely to the company profits and is therefore crucial to the working of the business.
This employee is given the term ‘keyman’, though the insured can be a woman as well. The purpose of keyman insurance is to cover the life of the keyman, so that in the event of his/her untimely death, the company can recoup the financial loss from the sum assured.
As said earlier, the keyman is a key functionary and his passing will likely result in a financial strain on the business. This cover is intended to help the company regain from the stumble and continue in a sustainable manner.
Benefits of Keyman Insurance
There are numerous benefits that keyman insurance can provide to a company. Here are some of them:
- Premium paid for keyman insurance is treated as business expenses under section 37(1) of the Income Tax Act. Hence, the premiums paid by the company are deductible from its taxable income.
- An obvious benefit is that key insurance will protect the business from risk resulting from the death of its keyman.
- With the passing of the keyman, the business can suffer from disruption of line of credit. The payout from insurance can help the company pay its bills/loans during this difficult time.
- This type of insurance can also keep the company’s share stable at the time of death of its key functionary. Company shares generally fall on hearing such news, but if investors know that any financial loss can be recouped through the insurance proceeds, they may not start selling their shares.
- On the other hand, keyman insurance helps the company further, when the keyman learns about it. This results in his/her morale getting boosted, which increases productivity and helps in retaining them for a longer period of time.
Scope of Coverage
There can be one or more key functionaries (keyman) in the company, and this insurance can be taken out on all of them. Partners in a partnership firm can also avail keyman insurance. A loss-making business or a company with declining profits, are normally not issued keyman insurance, but there have been exceptions.
The sum assured in keyman insurance varies from insurer to insurer, but here is a general outlook and the sum assured will be lower than the scenarios mentioned here:
Firstly, the sum assured will not exceed the amount that is ten times the compensation package of the keyman.
Secondly, the amount will be lower than three times the ‘average gross profit’ that the firm has achieved in the past three calendar years.
Thirdly, it will not cross five times the company’s ‘average net profit’ for the last three years.
Keyman insurance is an absolute must for businesses in India, which are mostly run by family members. According to the insurance regulator, only term plans can be utilised for this insurance. Exide Life Insurance offers affordable term plans that help you secure your businesses’ future.