Be your business a start-up, SME, or an MNC, there are some people whose contributions are majorly tied to the company's growth and stability. In short, they are the driving force of the company’s success. In case something unfortunate happens to those key persons, the business is likely to face serious financial and operational setbacks. That's where Keyman Insurance steps in.

Together in this blog, we'll explore:

What is a Keyman Insurance Policy?

Keyman Insurance is a type of life insurance product that a business buys on the life of a key employee or key managerial person. In this insurance, the key person is someone whose contributions are crucial to the company’s success. In the event of their sad demise or if they become disabled, the policy helps the company recover from the possible financial loss. So, the policy mainly focuses on protecting the business from the life risk of an important person.

Key Persons - Who Are They?

The key persons in business are those whose absence or sudden demise is likely to cause financial and operational setbacks on the business. These key persons are quite irreplaceable in the short term as they have unique skills, experience, or decision-making authority. Typically, a key person may possess specialized skills, sharp business vision, leadership abilities, strategic decision-making capabilities, or control over the company’s investments and finances.

The list of key persons generally includes:

  1. Founders or Co-Founders
  2. Chief Executive Officer (CEO)
  3. Managing Director (MD)
  4. Chief Financial Officer (CFO)
  5. Chief Technical Officer (CTO)
  6. Senior Sales Executives
  7. Business Heads
  8. Skilled Employees

Keyman Insurance - Why Does it Matter?

India is home to a diverse range of businesses, from family-run enterprises to emerging startups and established listed companies. Many of these businesses depend heavily on specific individuals whose expertise, network, or leadership is hard to replace.

Here are some examples for you -

  • The chief scientist of a pharmaceutical company.
  • The managing director of a company.
  • The lead sales executive in a startup firm.

Losing such a person could lead to loss of business contracts, delayed projects, reduced investor confidence, or even reputational damage. A Keyman Insurance Plan helps deal with these risks.

Keyman Insurance - How Does it Work in India?

Let's take a look at the step-by-step explanation of how keyman life insurance works in our country:
The company determines a key person it intends to insure.

  • The company purchases the life insurance policy on that person.
  • The company shells out the premiums.
  • And if the insured person is no more or has become disabled, the insurance company pays the sum assured to the business.

Keyman Insurance - Eligibility Criteria

Refer to the table below to understand the eligibility for the keyman insurance plan:

Who Can Buy the Plan?

  • Private Limited Companies
  • Public Limited Companies
  • Partnership Firms
  • Limited Liability Partnerships (LLPs)

Who Can Be Insured?

  • Directors
  • Founders
  • Promoters
  • Key Managers
  • Top-level Technical Experts
  • Star Salespeople

Age Limits

  • 18 to 65 years (with most Indian insurance providers)
  • Sum Calculation- 5 to 10 times the key person’s annual remuneration, or a percentage of company profits

Points to Consider

  • Sole proprietorships are generally not eligible for keyman life insurance
  • Exact criteria may vary depending on the insurance provider. 

Keyman Insurance Policy: The Benefits

The following are some of the key benefits of Keyman Insurance for businesses:

Financial Stability: In case of the unfortunate death of the insured key person, the insurance policy payout provides your business liquidity to manage debts, operational costs, hire new talent, and handle other short-term liabilities on time.

Business Reputation: When your business has a strong financial backup in place, you can continue the operations with ease. Moreover, it also assures your customers or investors that they should not panic. Hence, it guards your overall business reputation in the market.

Better Loan Eligibility: Finance providers, whether banks or non-banking facilities, consider the Keyman Insurance Plan as a green flag. When you have this plan, it shows that your business is well-equipped with risk management strategies.

Tax Benefits: Your business is likely to get tax benefits on premiums you paid against your keyman insurance plan under Section 37(1) of the Income Tax Act, 1961. It would be considered 'business expenses'. However, any payout received is usually treated as taxable business income. Please ensure you consult with your tax advisor for further assistance.

Keyman Insurance: Some Important Considerations

There are some important pointers to keep in mind when buying a keyman life insurance plan. Take a look:

Nominee Rules: The company (you) is both the proposer and the beneficiary.

No Benefit for Family: The family of the insured key person will not receive benefits from this policy.
Surrender Value: Most Keyman Insurance policies in India do not have a surrender value, especially in the first few years.

Policy Tenure: The plan tenure is likely to vary from 5 to 10 years. It depends on your business needs and the role the key person played in the company.

Final Thoughts

In today’s competitive and dynamic business environment, losing a key person leads to serious consequences. From startups to manufacturing firms, all kinds of companies can avail of Keyman Life Insurance benefits. Before buying any keyman insurance, it's a must to understand the eligibility for the Keyman Insurance policy and the benefits of Keyman Insurance.

FAQs on Keyman Insurance

Is buying Keyman Insurance mandatory in India?

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Buying Keyman life insurance is not mandatory in India, but it is highly recommended for businesses that depend on key individuals.

Is the claim amount taxable?

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Yes, the payout is considered business income. So, it is taxed accordingly.

How much coverage is considered enough?

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Ideally, it should be 5 to 10 times the key person’s annual salary or a percentage of the company turnover.

What if the key person’s family claims benefits from this policy?

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Under keyman insurance, the company is both the policy owner and beneficiary. So, the family of the key insured person cannot claim the benefits.