Key man insurance policy: Introduction, Advantages & Disadvantages

Key man insurance policy: Keyman insurance is defined as an insurance policy where the proposer as well as the premium payer is the employer, the life to be insured is that of the employee and the benefit, in case of a claim, goes to the employer. The `keyman’ or ‘key person’ would be any person employed by a company having a special skill set or substantial responsibilities and who contributes significantly to the profits of that organization.

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Key man insurance policy

Key man insurance policy

Key man insurance policy ,popularly known as key person insurancepolicy is mainly intended for compensating the loss occurred due to the death or the loss that would likely to arise as a result of permanent disability of key income generator of the business. Even though the policy does not compensate the entire loss occurred ,it assist the business with some fixed amount depends on the type of policy.

Many businesses have a keyperson who is responsible for the majority of profits, or has a unique and hard to replace skill set such as Intellectual Property that is vital to the organization. Anemployer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company.

A key person can be any one who is directly associated with the performance of business and whose disability may affect the business adversely.For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skillsor knowledge which is especially valuable to the company.

Advantages of key man insurance :

  1. In case of death of a keyman the company is paid money to cope up with the loss.
  2. Any business concern buying keyman insurance for its employee can claim a deduction for the premium paid for the policy as a business expense under Section 37(1) of the Income Tax Act.
  3. This policy can be used as either an extra super annuation benefit or an ex-gratia payment to the key employee during the service period. If the company receives the proceeds on maturity, then they are taxable.
  4. No need of giving advanced intimation to the income tax authorities.
  5. The company can also raise loans on the policy from LIC.
  6. For the executives earning high salaries, this policy can be given as a hike in salary and saves income tax.
  7. It becomes a great help to the business for their tax planning.
  8. The directors can also safeguard their immediate family from getting affectedby the vagaries of the industry and the various business cycles that the business has to encounter.
  9. This policy helps to improve the retention of key human resources of the business.

Disadvantages of key man insurance :

1.The amount on claim or maturity under a keyman insurance policy is not exempt under Section 10 (10D) of the Income Tax Act if the company is paying the premiums unless the policy is assigned to key person who himself/herself pay the premium.

2.If the policy is surrendered then the amount endorsed is taxable in the hands of key man as profit in lieu of salary.

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