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KEY MAN INSURANCE

A PROMISING BUSINESS OPPORTUNITY


(Cir: Actl/2000 dt.11/03/2005)

What is Keyman Insurance?

In today’s world of professional management success of a company solely depends on the Individual
Talents of certain Managers, whose Vision, Skill, Integrity and Managerial capability is essential for
the future progress and prosperity of the company.

Exit of these key persons due to premature death would in most cases result in immediate financial
loss to the company and question arises, how does a company replace talent like that?

The company on the lives of such Key Persons purchases Keyman Insurance and in event of
premature death of Key Person Company gets the insurance proceeds.

Keyman Insurance Proceeds will cover:

 The loss of sales attracted by his/her ability and personality.


 The loss due to his/her day to day special skills.
 The cost of Recruiting and Training a suitable replacement.
 The cost of delay or cancellation of any project upon which he/she is working.
 The loss of opportunities for future expansion.
 The loss of stable Management and good labor Relations.
 The Reduction of Credit Standing of the company due to:
---Withdrawal of credit facilities by Banks and other institutions.
---Recall of existing loans Guaranteed by Keyman.
---Refusal of suppliers to deliver goods without prior payment.

Typical examples of Keyman

 Managing Director/CEO
 Financial Director
 Sales Director
 Project Manager
 Inventor
 E-commerce manager etc.

Eligibility of companies:
Keyman insurance is open to all categories of business firms except:
1. Proprietorship firms owners.
2. Firms where shareholding of Key person is over 75% and Family shareholding of Key person is
over 90%. (Family will include spouse and minor children only). Proposals beyond these limits but
less than 100% holding by Keyman/Family can be considered at CUS on case to case basis.
3. Company not making profits for the last three consecutive years.
4. When the profit and turnover of the company are on the decline.
How the amount of Insurance is arrived at?
A. Directors of Public limited company, Private limited Company with at least 10 employees and
Partners of Partnership firm

1. Multiple of Keyman’s Compensation Package:


The Insurance will be limited to 10 times of Keyman’s compensation package including perks.
(The notional value of the perks can be taken as 30% of the gross annual salary).

2. Gross profit method:


The Insurance will be limited to 2-times of average Gross profit for last 3-years (before
depreciation and taxation).

3. Net profit method:


The Insurance will be limited to 5-times of average net profit for last 3-years (after depreciation
and taxation).

The Maximum insurance allowed will be restricted to least of the amounts arrived at by above
three methods and distributed among all the key persons proposed for. There is no restriction on
turnover of partnership firm.

B. Private limited Company with less than 10 shareholders/employees


Maximum keyman insurance allowed will be restricted to 3 times of average net profit of last 3
years.

C. Companies where 3 years P/L accounts are not available:


Companies having 2 years P/L account:
Maximum keyman insurance allowed will be restricted to 2 times of average net profit of last 2
years.
Companies having 1 year’s P/L account:
Maximum keyman insurance allowed will be restricted to equal to net profit of one year.

D. Keyman Insurance to Employees of Public limited/ Private limited/Partnership/ Proprietary


firms:
Keyman insurance to employees of above firms will be restricted to 10 times the salary for the
latest financial year as reflected in Form No.16. The firm should be profit making one and the
profits for the last three years should justify the cover being allowed. (3 times of average gross
profits or 5 times of average net profits, whichever is lower).

E. Key Man Insurance on the Basis of Loan Liability:


Key man insurance is also considered on the basis of loan liability of the company. If the
company has taken a loan from a bank/financial institution, KMI to the extent of 2/3 of the loan
can be considered on the life of its Directors, since the repayment of loan is dependant upon the
profitability of the company, which to a great extent depends on the Directors. For example, if a
company with 3 Directors has raised a loan of Rs. 1.00 crore, S.A. of Rs. 22 lac under KMI can be
considered on the life of each Director, in general.
The following requirements, apart from usual requirements, must be submitted:
 Copy of Project Report / viability report submitted with application for loan and agreement
regarding the terms and condition of loan.
 Letter regarding sanction of loan. Proof of loan having been availed of Further,
 Term of the policy shall not exceed the repayment term for the Loan.
 The company should be capable of paying the premium. However, quantum of S.A. will not
be restricted to 3 times / 5 times of profit as described earlier.
 Credentials of the company should justify acceptance of the KMI.

Requirements for Key man Insurance proposal (for companies):

i) Copy of Memorandum & Articles of Association.


ii) Copies of Audited Balance Sheets and Profit & Loss A/cs for preceding 3 years.
iii) Certified true copy of Board Resolution passed in the meeting of Board of Directors containing
following information :-
 Sum Assured desired.
 Name & signature of the person who is authorized to complete proposal papers.
 The use of seal of the company.
iv) Keyman Questionnaire (to be completed in the prescribed format and the same is to signed by
the authorized person under the seal of the company).
v) Copies of I.T. Returns of the company for preceding three years.
vi) Consent for the endorsement for assignment/ surrender to be placed on the policy.
vii) Proposal Form No. 340 and usual medical requirements (as applicable to individuals) for Key
man.
viii) In case of employees: Proof of keyman’s salary/ copy of employment contract/Individual
ITR’s/ Form 16 for last 3 years or less as applicable.

Requirements for Key Man Insurance under Partnership Firm:

 Proposal Form in F.No. 340 and usual medical requirements on the life of the Key – man
Partner.
 Copy of Deed of Partnership duly attested by the partner authorized to sign insurance proposal
along with copy of supplementary Partnership Deed.
 Copies of Audited Balance Sheet and Profit & Loss A/Cs for the last three years containing
schedule of partner’s capital A/cs.
 Copies of Income Tax Returns of the firm for preceding three years duly attested by the
authorized partner.
 Letter of Authority in favour of partner signing the proposal.

Plans Allowed:
Plan 822- Anmol Jeevan II, and Plan 823- Amulya Jeevan-II.

Tax Benefits of Keyman Insurance


 Premiums paid by company qualify as eligible business expenses under Sec.37 (1) of the Income
Tax Act.
 Premiums paid by the company are not a perquisite in the hands of the Keyman.
 The Maturity/Death claim amount received by the company will be added to the business income
of the company in the year of receipt.
 On retirement/premature resignation of Keyman, the company has following choices:-
a) It can surrender the policy.
b) It can assign the policy to Keyman, as policy has no surrender value.

How is KMI a bonanza for corporate Sector?

 The company is protected against the financial loss in the event of Keyman’s death.
 The company is able to create an asset for itself in the form of Sum assured and
guaranteed/loyalty additions.
 It gives a substantial relief to the company in Income Tax.
 It protects the interest of other employees, shareholders and customers.
 It keeps the company’s position stabilized in the market.
 It generates confidence, sense of security and loyalty in the minds of Keyman.
 It can be given as security to Bankers even though policy is not allowed to be assigned.
 It is a guarantee to the creditors.