Keyman Insurance (for companies) 1

Who is a Keyman? A man instrumental to either gain or loss of the company can be termed as Keyman. Exit of such a key person due to premature death would in most cases result in immediate financial loss to the company Typical examples of Keyman • MD /CEO • Directors • Project Managers Plans Allowed: Table 164- Anmol Jeevan, and Table 190- Amulya Jeevan-1. 2

What is Keyman insurance? Key-man insurance is the cover effected by a company to compensate the financial loss suffered following the death of a key member of the staff in an organization. What does the proceeds of Keyman insurance cover ? The loss of sales attracted by his/her ability and personality. The loss due to his/her day to day specialized 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. 3

Eligibility for companies Open to all categories of business firms except: 1.Proprietorship firms owners. 2. Firms where shareholding of key person is over 51% and Family shareholding of Key person is over 70%.(Family will include spouse and minor children only). 3. Company not making profits for the last three consecutive years. 4. When the profit and turnover of the company are on the decline. 4

Requirements for Key man Insurance proposal (for companies) 1) Copy of Memorandum & Articles of Association. 2) Copies of Audited Balance Sheets and Profit & Loss A/c’s for preceding 3 years. 3) 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.

Requirements for Keyman Insurance proposal (for companies) 4) 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). 5) Copies of I.T. Returns of the company for preceding 3 years. 6) Consent for the endorsement for assignment/ surrender to be placed on the policy. 7) Proposal Form No. 340 and usual medical requirements (as applicable to individuals) for keyman. 8) 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.

How is the amount of amount of Keyman insurance calculated Directors of Public limited / Private limited Company with at least 10 employees 1. Multiple of Keyman’s Compensation Package: 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: Limited to 2-times of average Gross profit for last 3-years (before depreciation and taxation). 3. Net profit method: Limited to 5-times of average net profit for last 3-years (after depreciation and taxation). Maximum insurance allowed restricted to least of the amounts arrived at by above 3 methods & distributed among all the key persons proposed for.

How is the amount of amount of Keyman insurance calculated Pvt ltd company with less than 10 shareholders/employees Restricted to 3 times of average net profit of last 3 years Companies where 3 years P/L accounts are not available: Companies having 2 years P/L account - 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.

How is the amount of amount of Keyman insurance calculated Keyman Insurance to Employees of Public limited/ Private limited/Partnership/ Proprietary firms: 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 3 years should justify the cover being allowed. ( 3 times of average gross profits or 5 times of average net profits, whichever is lower).

How is the amount of amount of Keyman insurance calculated Key Man Insurance on the Basis of Loan Liability: 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 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. Note: Additional documents are required to be submitted

Tax Benefits (for companies) 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.

What if Keyman retires prematurely? On retirement/premature resignation of Keyman, the company has following choices: a) Company can surrender the policy. b) Company can assign the policy to Keyman, as policy has no surrender value.

Why Keyman insurance? Protects 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. Offers substantial income tax relief to the. Protects the interest of other employees, shareholders and customers. Keeps the company’s position stabilized in the market. 13

Why Keyman insurance? 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. 14

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