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Employee BenefitsKey Man Insurance

Wondering what will happen to your flourishing business when the 'keyman' - either you or your director or some key persons who, on account of their specialized, skills, foresight and business acumen, bring greater revenues, profits, brand-value to the organization is no longer there. Certainly, the sudden departure of key professionals from a growing organization can have a negative impact on its future prospects.

A Keyman Insurance can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of the member of the business specified on the policy.

How it Works?

A company purchases a term life insurance policy on the key employee, pays the premium and is the beneficiary of the policy. If that person dies unexpectedly, the company receives the insurance payoff. A keyman insurance policy helps the company survive the blow of losing people who make business happen.

Who can be a Keyman?

Anybody with specialized skills, whose loss can cause a financial strain to the company are eligible for Keyman Insurance. For example, they could be:

  • Directors of a Company
  • Key Sales People
  • Key Project Managers
  • People with Specific Skill
Tax Implications - employer

A Company buying key man 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.

The Claim amount received by the company, however, is completely taxable.

Tax implications - employee

The Company also has the option to assign or endorse the insurance policy in favor of the key employee (keyman) who has been insured under the keyman insurance policy. If such an assignment happens when the keyman is an employee of the company or at the time of retirement, the surrender value of the policy at the time of assignment is taxable in the hands of the keyman as "profits in lieu of salary" and taxable at the applicable tax rate. The maximum marginal rate of tax in the hands of individuals is 33.99%.

Where no employer-employee relationship exists at the time of an assignment, such surrender value or any other payment is taxable as "income from other sources" in the hands of the keyman. The tax incidence is the same as above.

The CBDT circular, which provides guidelines in respect of taxability of amount received under keyman insurance policy, does not, however, provide any guidance on tax implications in the hands of the keyman when he finally receives money from the insurance company.

To get our customized ONE PAGE comparative quotes. Please fill the form below and attach a sheet with detailed list of employees, with date of birth and coverage required.

To get our customized ONE PAGE comparative quotes, please fill the form below

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