What is a keyman insurance policy?

Keyman insurance is a policy plan taken to secure a company or a business concern against financial loss that might arise on account of the premature death or incapacity of a critical employee or director.

Who all can be Keyman?

Such an insurance policy can be taken by the company for any of the employee or critical person possessing specialized skill set or assuming considerable responsibilities whose absence can cause financial strain to the company, including directors of the company, project managers, key sales person or any other person with specific skills.

Nature of the keyman insurance policy

Such an insurance is a term insurance policy and the sum assured value is determined on the basis of the profitability of the concern instead of the individual income of the keyperson. So, the insurer will assess the audited financial statements as well as filed income tax return of the concern to determine the sum assured value.

In a general case, to be eligible for keyman insurance, company or the business concern should be in a profitable position. Sometimes, insurers also provide keyman cover to companies which are incurring losses but at the same time are adequately financed. Also, the keyperson insured through a keyman insurance must not be holding over a certain percentage in the capacity as a shareholder. Though this varies from insurer to insurer, generally the person should hold below 50% shareholding.

The company or the business makes the premium payment which as a whole is treated as a business expense and thus is tax-efficient. Benefits of the policy are paid to the company in case the critical person dies. It must be noted that unlike individual term insurance plans, death benefit that accrues to the company or business concern is taxed as income.

How important is keyman insurance?

Keyman insurance assumes higher importance in case of family businesses that depend extensively on few members as it then ensures that business is able to absorb financial loss due to the early death of the keyperson and continues its operations sustainably. In case of companies also the keyman insurance cover provides for an amount that helps to cope up with the financial loss due to the untimely and premature death of the critical person.

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