Keyman insurance | Key Person Insurance

Have to ever wondered about the insurance of your business: the key person, your employees. Businesses are run by experienced and skilled individuals and employees. These are the foremost contributor to the success of each business if just in case the key person the most individual behind the expansion of success dies then the corporate has to face a lot. to cover up all the losses after the keyman dies keyman insurance or key person insurance is introduced. Let’s study in deep about keyman insurance and its advantages and far more.

Keyman insurance | Key Person Insurance

What is Keyman Insurance?

Keyman insurance is additionally called key person insurance is a life insurance policy a type of business insurance. In detail, the corporate which depends on the keyman’s skills, revenue, or performance buy the insurance if the keyman dies within the policy period he/she will receive a death benefit which might conceal all the financial losses of the corporate.

This type of insurance can also be known to be key woman insurance or business life insurance, here the company is the beneficiary of the policy and its main motive is to compensate all the financial business losses after a key person’s death. It provides the financial security and protection of assets to rent another top person within the corporate.

Typical examples of keyman are:


• Director

• Project Manager

• Business Partner

How does Keyman Insurance Works?

In most cases the keyman insurance is purchased by the corporate owner who takes care of all the business without him/her there would be no value to the business and other cases for the key employees. Within keyman insurance, only term insurance can be purchased which gets expired at the retirement of the employee. 

If the key person dies within the term period a death benefit is paid to the beneficiary or if the policy gets matured then no benefit is provided. The sum provided by the insurance underwriter will be accustomed avoid bankruptcy if the corporate is just too large or will be accustomed pay debts, hiring a new key person, salary to employees, or finishing off the business without other losses.

Advantages of Keyman Insurance

Keyman insurance can provide a new life to the business if the owner or key person dies most significantly for the family businesses. Let’s study all the benefits of the keyman insurance

• This policy helps the companies to cover up financial losses if the key person of the corporate isn’t anymore.

• Avoids bankruptcy if the business has to pay debts.

• Maintains stability within the companies shares if the key person isn’t anymore.

• The company can claim tax benefits.

• This policy serves as collateral for banks.

• The competitors won’t be able to take advantage of the situation caused by the unfortunate death of the keyman.

Disadvantages of Keyman Insurance

• We get only term insurance policies under key-person insurance.

• The death benefit is taxable.

• Riders aren’t allowed.

• Term of cover should not exceed the Retirement or Superannuation.

Face Value of Key person

• Factors that determine the face value of a key person is as follows:

• An investment that an organization will require to develop a replacement key person.

• Contribution of a key person to profitability and growth of the organization

• The potential loss that the organization is probably going to suffer just in case of the sudden death of the key person.

Also Read: Whole Life Insurance Quotes Online

you may get a question about a way to determine the face value of the key person, so let’s understand it very well.

I am going to tell you the three methods to determine the face value of the key person

Method 1

3 times the average gross profit of the organization for last 3 years.

Method 2

5 times the average net profit of the organization for the last 5 years.

Method 3

10 times the annual compensation including salary, bonuses, and other perquisites.

Tax Benefits

Premium paid by the organization for keyman insurance would be treated as an Allowable Deducted u/s 37(1) of the income tax Act. (CBDT Circular No: 762 Dt. 18/02/98).

Premium paid by the organization won’t be treated as a Prerequisite within the hands of Peyman under Para (V) of Section 17(2) of income tax Act since the key person doesn’t derive any benefit from the insurance of his/her life.

The maturity received by the organization on account of the death of the key person are added to the total business income of the organization and shall be taxed accordingly. Exemption u/s 10(10D) won’t be available to the organization. However, in case, the policy has been assigned to the keyman and the keyman is paying the premium then the maturity proceeds are exempt u/s 10(10D).

Eligibility Criteria

To be a keyman one must fulfill these all eligibility criteria, here are the eligibility parameters as follows.

• The employee role must be critical for the business.

• He/she must hold <51% of the stake within the company.

• His/her shareholding must not be greater than 70% of the whole share capital of the corporate.

How to buy a Keyman Insurance policy?

Keyman insurance policy is most significant for the business which is supported by the skilled or key persons whose skills can’t be replaced but this policy can provide with you the amount to heir new employee or replace with another. Business willing to buy a keyman insurance policy needs to approach an underwriter and follow all the procedures with proper documentation.

The documentation required to buy a keyman insurance policy is as follows.

• Copies of income tax returns of the corporate of the last three financial years.

• Copies of the Memorandum of Association and also the Articles of Association of the corporate.

• Copies of the audited financial records of the last three years

• A certified true copy of the board resolution has to be passed by the Board of Directors of the corporate.

• For placing an endorsement on policy consent is required by the corporate.

Also Read: 5 Things to consider before Buying Life Insurance.

Best Keyman Insurance companies in 2022

There are many keyman insurance companies available within the market. we’ve got reviewed some companies based on price, rider, financial strength, etc. to assist you to decide on the best better.

• Lincoln Financial

• AIG Direct

• Haven Life

• Guardian

• Mutual Of Omaha

• Prudential Financial

• Nationwide

• Allstate

• Petersen International Underwriters

• Embroker

Also Read: Top 10 Life Insurance Companies in USA 2022

What if keyman retires prematurely?

On retirement premature resignation of the key person, the organization has the subsequent options.

The organization can surrender the policy.

The organization can assign the policy to the key person as the policy has no surrender value ( in most cases).

If the policy after attaining the surrender value is endorsed to the key person then the surrender value is chargeable to tax u/s 17 of the IT Act. it’s treated as profit in lieu of salary within the hands of the employee.

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