"Life insurance isn't meant for people who die. Life insurance is meant for people who live." Who said this doesn't really matter, what matters is that there is an important lesson to learn from this.
The basic tenet of life insurance is to indemnify the survivors against financial loss. 'Keyman' is one such type of insurance.
Keyman insurance can be 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' here 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 organisation.
In case of an unfortunate eventuality to the 'keyman', two types of losses can arise -- (a) Loss arising from profit reduction for the company and (b) Costs for the company in replacing the keyman.
Various types of life insurance policies are available in the market today. Both endowment policy and term policy can be bought under keyman insurance. Some companies even offer ULIPs under keyman insurance.
Let us take a brief look at the pros and cons of buying keyman insurance.
Advantages of keyman insurance to the firm
In case of death of a keyman the firm gets money to cope up with the loss
Any company 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.
Disadvantages of Keyman insurance
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. However, in case the policy has been assigned to the keyman and the keyman is paying the premiums, then the claim/maturity proceeds are exempt under Section 10 (10D).
If the policy, after attaining surrender value, is endorsed to the employee, then the surrender value/maturity value is chargeable to tax under Section 17 of the Income Tax Act. This is because it is treated as 'profit in lieu of salary' in the hands of the employee.
As is evident, the demerits of keyman insurance are more tax-oriented than insurance-oriented. Which means that buying keyman insurance is still beneficial from the company's point of view.
This is primarily because of the significant role that a keyman plays in keeping a company rolling. It pays to insure the keyman to protect the company from any contingencies to the keyman.
Also, the policy is beneficial from the keyman's point of view. This is in case the company decides to endorse the policy to the keyman. This can be done only after a surrender value has been attained, which usually takes 2-3 years (depending on the insurer).
In doing so, the keyman benefits, by having an insurance policy in his name the initial premiums of which, have already been paid by his company.
And although he might have to pay tax on surrender value, if endorsed in the early years when the surrender value is low, the tax liability of the keyman is reduced to a great extent after accounting for the premiums paid by his company.
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