Organizations do not manage themselves. For the business to expand, they want knowledgeable and qualified employees to plan, carry out, and implement business decisions. In actuality, a person’s knowledge and natural talent may be the secret to the company’s success. In such circumstances, the business would suffer a significant loss if the main employee who was driving the company’s expansion passed away. The company lost the employee’s technical expertise and skills, which aided in its expansion. Also, employing another person to take the deceased’s place will cost a lot of money. The market offers Keyman insurance coverage to compensate the company for this loss.
What Does the Term ”Keyman” Mean?
Every business employs a variety of people with clear roles and duties. Some of these workers are essential to the operation, effectiveness, or financial success of the business. These staff members may be the top salespeople, decision-makers, senior executives, or even junior IT staff members who have a significant impact on the company’s performance.
The organization selects a group of “key” workers who make a major contribution to its success and/or growth. Losses from decreased profits and/or the cost of hiring a replacement keyman may occur from the loss of such an employee.
What is Keyman Insurance?
A key person or keyman insurance policy is a specially created term insurance policy that the employer purchases on the lives of its key employees. With a Keyman Insurance Policy, the Corporation is the nominee, and the Key Employee (Keyman) is the Life Assured. If an employee passes away during the Policy Term, the Company will get the Amount Assured. This compensated the Company for any monetary losses and diminished earning potential brought on by Keyman’s passing. The Company itself pays the premium for the Keyman Insurance Policy.
Features & Benefits of Keyman Insurance
Here is the list of features and benefits of the keyman insurance policy.
- Whereas previously, employers may acquire term insurance or endowment life insurance plans with maturity benefits such as Key Man Insurance, IRDAI has recently made it necessary for them to only do so.
- The “keyman” cannot own more than 51% of the stock of the company. Also, the keyman and their immediate family should own more than 70% of the company’s stock in total.
- keeps the value of the firm’s stock relatively steady since investors are reassured that there will be no financial impact if a key employee passes away if the company has Key Man Insurance. Due to the financial safety net provided, if a key person is lost, it raises the company’s valuation.
- If the company has taken out loans based on the key employee’s guarantee, the employee’s passing would subject the company to a sizable amount of responsibility. A Keyman insurance policy’s proceeds can assist the company in covering these liabilities and averting a financial emergency.
- Even in the event of the key employee’s passing, the price of the company’s stock does not move drastically when it has a backup plan in the form of Keyman insurance.
- Under Section 37(1) of the Indian Income Tax Act, 1961, the premium for a Keyman Insurance Policy may be considered a business expense.
What Does Keyman Insurance Policy Cover?
Key Person Insurance provides a death payout to a company if a key employee passes away suddenly (s). Any individual with specialized skills, competence, and knowledge whose loss could result in serious financial harm to the business can be covered by this type of policy. The death benefit of the policy is paid to the firm upon the death of the insured, and it may then be utilized for a variety of things, including:
- Making up for diminished sales, daily running costs, or losses brought on by the postponement or cancellation of any business endeavour involving the key individual.
- Securing and preparing a competent substitute for the key individual
- In the event of liquidation, paying off debts, distributing funds to investors, offering severance to workers, and winding down operations in a timely way.
- The death benefit can also be utilized to match the value of the guarantee if the relevant individual was involved in guaranteeing commercial loans or banking facilities.
Categories of Loss Covered by Key Person Insurance
A business can be protected against a variety of dangers with key person insurance. For instance, it might offer:
- Insurance to safeguard earnings, such as compensating lost revenue from slashed sales or losses brought on by the postponement or cancellation of any company project involving a key individual.
- Insurance is intended to safeguard partnership or shareholder interests. Normally, this allows the surviving partners or shareholders to buy the deceased person’s financial interests.
- Insurance for anyone responsible for securing commercial loans or banking services. The insurance coverage’s value is set up to be equivalent to the guarantee’s value.
What Are The Things Excluded Under Keyman Insurance Policy?
The following general exclusions are included with Key Person Insurance:
- A key employee departing the business (i.e. when there is no death or disability)
- The Key Person’s intentional dishonesty, deceit, or fraud
- Suicide of the Important Individual
Also, any false information provided or wilful omissions made during the policy’s application procedure will result in claim denial.
What Are The Eligibility Criteria For a Person To Be Considered a Keyman For The Company?
To be considered a Keyman for the Company, an employee must essentially meet the following three requirements:
- The “Keyman” should own less than 51% of the company for which he or she is employed.
- Less than 70% of the company’s total share capital should be held by the Keyman and his family collectively in the form of shares.
- There must be evidence of the Employee’s crucial contribution to the company’s operations.
Individual Income Evidence will be used to determine eligibility for the insurance if the employee owns more than 51% of the business or if the Keyman and his/her family members collectively own more than 70% of the company.
What is the Appropriate Sum Insured for a Keyman Insurance Policy?
Typically, the following factors determine a keyman insurance policy’s sum assured:
- The sum assured will not be greater than ten times the Keyman’s total yearly income, including salary, bonuses, and all other perks.
- The Amount Insured will not exceed three times the Company’s average gross profit over the previous three calendar years.
- The sum assured will not be greater than five times the company’s three-year average net profit.
The Company’s permitted Sum Assured for Keyman Insurance shall be the lowest sum computed in under the aforementioned 3 methodologies.
How To Buy Keyman Insurance?
If you are looking to buy keyman insurance, then you can simply buy it via offline or online mode.
|Online Mode||Offline Mode|
Frequently Asked Questions
Here are some of the frequently asked questions that you must know.
A Keyman insurance coverage cannot be purchased by organizations that are losing money.
No, Keyman insurance only permits the purchase of term insurance policies.
The following papers must be presented to get a Keyman Insurance Policy:
A proposal form that is properly completed and signed and names the company as the proposer.
- A Keyman Questionnaire that has been approved by the company’s authorized representative;
- The Keyman’s IT returns over the previous three years
- Documents of the Company’s Memorandum and Articles of Association
- A board resolution containing the name of the keyman and the amount of insurance needed for the keyman’s life. The Company’s Authorized Signatory must affix their signature to the Board Resolution.
- Properly certified copies of the company’s most recent three years’ worth of audited financial statements, profit and loss statements, and balance sheets.
In essence, a Keyman Insurance Policy is a Term Insurance Policy with the Corporation as the Policy’s Nominee. Only in the event of the Keyman’s passing during the Policy Period does the Company receive the Policy Amount Guaranteed. If the Policy matures without Keyman passing away, the Company would not receive any benefit.