KEY PERSON INSURANCE – FAQS
What is Key Person Insurance?
Key Person insurance also referred to as key man insurance is a life
insurance policy proposed by an organisation on the life of a Key
Person.
insurance policy proposed by an organisation on the life of a Key
Person.
Who is a “Key person” ?
A Key Person can be a key employee or a key executive or a whole time
director. It can be any employee who makes a significant contribution
to the performance of the organization
director. It can be any employee who makes a significant contribution
to the performance of the organization
What is the objective behind taking a Key Person Insurance policy?
A Key Person insurance policy is taken to indemnify the company
against the risk arising out of death of a Key Person.
against the risk arising out of death of a Key Person.
What are the possible risks that arise on death of a Key Person?
The following are some of the risks that an organisation is exposed to
when a Key Person dies:-
when a Key Person dies:-
- Reduced sales and production
- Reduction in value of business Reduced customer and supplier
confidence Delay or termination of projects - Weakened credit standing of the organisation.
- Possible hostile takeover Reduced brand value
In the light of the above said risks, how can Key Person insurance
come to the rescue of the organisation?
come to the rescue of the organisation?
The proceeds from Key Person insurance can be utilized to take care of
the above said apprehensions. The proceeds from a Key Person
insurance policy can be used in one of the following ways:-
the above said apprehensions. The proceeds from a Key Person
insurance policy can be used in one of the following ways:-
- Provide fund to recruit and train a suitable replacement
- Assure the customers and suppliers about the financial strength
of the organisation - Compensate the loss.
- Pay compensation to the family of deceased Key Person.
What kind of organisations would be interested in Key Person
insurance?
insurance?
Key Person insurance can be positioned to all organisations both big
and small. However certain conditions need to be kept in mind.
and small. However certain conditions need to be kept in mind.
- Key Person insurance can be extended to employees / executives of
public and private limited companies. - Key Person insurance cannot be extended to partners of a partnership
firm. - Key Person insurance cannot be extended to the proprietor of a sole
proprietorship firm
Who will deal with the insurance company in case of Key Person
insurance cases?
insurance cases?
An authorised signatory as identified through a board resolution will
deal with the insurance company. All relevant documents submitted by
the company will have to be signed by the authorised signatory.
deal with the insurance company. All relevant documents submitted by
the company will have to be signed by the authorised signatory.
Can all Life Insurance Policies be extended under Key Person insurance?
No. Only PURE TERM plans can be extended under Key Person
insurance.
insurance.
Who is the nominee in case of Key Person insurance policies?
Key Person insurance policies are proposed by the company on the life of
key employees. Since the company itself is the proposer, there will be no
nominee in case of Key Person insurance policies.
key employees. Since the company itself is the proposer, there will be no
nominee in case of Key Person insurance policies.
If a Key Person dies during the term of the policy. Is the company
obliged to pay the death benefit to the family of the deceased
employee?
obliged to pay the death benefit to the family of the deceased
employee?
Key Person insurance is taken by a company for its own benefit and not
for the benefit of the employee. Hence if a Key Person dies during the
term of the policy, the company does not have an obligation to pay death
benefit to the family of the deceased Key Person.
for the benefit of the employee. Hence if a Key Person dies during the
term of the policy, the company does not have an obligation to pay death
benefit to the family of the deceased Key Person.
What happens if a Key Person leaves the company during the term
of the policy?
of the policy?
In case a person leaves the organisation, the company can exercise one
of the following options:-
of the following options:-
- Assign the policy to the outgoing Key Person in appreciation of his
services. - Surrender the policy
- Stop paying premiums as the life assured is no longer an employee.
What are the tax benefits that a company can avail on the premiums
paid towards a Key Person insurance policy?
paid towards a Key Person insurance policy?
Premiums paid by a company towards a Key Person insurance policy
taken on the life of a key employee is treated as an approved business
expenses under section 37(1) of the Income Tax Act 1961.
taken on the life of a key employee is treated as an approved business
expenses under section 37(1) of the Income Tax Act 1961.
Will the premiums paid towards Key Person insurance be treated as
a taxable perquisite in the hand of the Key Person?
a taxable perquisite in the hand of the Key Person?
The premium is directly paid by the company to the insurer. The Key
Person has no control on how the money is being utilized and hence the
same is not treated as a perquisite in the hand of the Key Person
Person has no control on how the money is being utilized and hence the
same is not treated as a perquisite in the hand of the Key Person
A company has decided to surrender a Key Person insurance policy
it had taken in name of one of its key employees. What is the tax
implication on the surrender proceeds received by the company?
it had taken in name of one of its key employees. What is the tax
implication on the surrender proceeds received by the company?
Surrender proceeds from such a policy would be treated as an “Income
from other sources” in the hands of the company and taxed accordingly
from other sources” in the hands of the company and taxed accordingly
Mr. Kumar wants to surrender the Key Person insurance policy
which was assigned to him by his last employer when he left his last
company. What would be the tax implication on the surrender
proceeds?
which was assigned to him by his last employer when he left his last
company. What would be the tax implication on the surrender
proceeds?
Surrender proceeds from such a policy would be treated as an “Income
from other sources” in the hands of Mr. Kumar and taxed accordingly.
from other sources” in the hands of Mr. Kumar and taxed accordingly.