Lic of India Keyman insurance is taken by a small and large business firm on the life of most important employee(s) like CEO, COO, Director etc to protect the firm against financial losses, which may occur due to the suddent, accidental or premature demise of the Keyman person.
What is a 'keyman (KM)'?
The term indicates a person who is an employee in a
business organization at such an important post (an
executive, a director, an expert, a technocrat etc)
whose death would result in a financial loss to the
What is 'keyman insurance'?
Life insurance corporation (L.I.C) of India provides
the policies for such employees of a business organization
whose premature death would cause a financial loss to
the organization. The insurance taken on the lives of
such person to protect the business from financial loss
is called 'keyman insurance'. The premium on such policies
has to be paid by the employer.
Eligibility for keyman insurance
The 'keyman insurance (KMI) is allowed to the employee
if he satisfies the following condition;
- The 'keyman' should hold less then 51% shares of
- The total no. of shares of the company held by the
keyman and his family should be shares of the company
held by the keyman and his family should be less then
- The keyman should be literate.
Factors to be considered for insurance cover on
- Key-man's qualification.
- Experience in different fieldas.
- Previous record and service period in the organization.
- Is he the only key-man in the specific field or
- Proposer - the company
- Plans allowed - 164 only
- Term- 10-15 years on the basis of retirement age
or service contract.
- Accident benefit and nomination are also not allowed.
- Assignment is allowed only in case of absolute assignment
in favour of the key-man if he leaves the job of the
- In the standard policy forms following changes should
be done while issuing the key-man insurance.
- Delete the words "nominee under section 39
of the insurance act".
- Write the name of the life assured and proposer.
- Place the following endorsement on the policy:-
- either absolute assignment in favour of the life
assured (KM) or surrender to LIC for its cash value.
- Max. age at entry - 65 years.
- Maturity age -75 years.
The S.A. under key man insurance can be decided
by using the following methods:-
- The max .S.A. for key man insurance is restrictedto
10 times of the key man's compensation package (total
salary + annual bonuses of a regular nature and paid
a fixed percentage of salary + various other perquisites
such as furnished houses, utility bills, car and commission
out of net profit) The notional value of perquisites
is taken as 30% of the gross annual salary.
- Method of gross profit:- there time of the average
gross profit (profit before depreciation) of three
- Method of net profit:- 5 times the average net profit
(profit after allowing depreciation & taxation)
of last 3 years. On the basis of above mentioned methods
we can decide the ma. Sum assured (S.A.) for key man
- Note:-no key man insurance (KMI) can be issued in
case of company's profits/ turnover is declining,
unless there are very special circumstance.
- Max. S. A. in case of private Ltd. Companies or
closely held public limited companies:
- (i) no. of shareholders/employees- 10 or more
- (ii) max .S.A - to be treated at par with public
- (iii) no. of shareholders/employees - more then
5 but less then 10
- (iv) max .S.A. - 3 time the last 3 yrs average
net profit(before tax)
- Max .S.A. under KMI for the recently established
companies in case of audited P& L accounts are
key man insurance to employee of partnership firms:-
- Max allowable KMI cover to partnership firms
- 3 times of average gross profit of 3 year.
- 5 times of average net profit of 3 year, whichever
- The max. amount of cover will be distributed among
the key partners.
- Key Man Insurance can be given on the lives of
more then one partner.
Requirements to allow KMI to the employees firms/proprietary
- Duly filled key man questionnaire
- key man's salary proof. Copy of the employment/
individual I T R/from no.16 for last 3 years
- audited account of the firms for last 3 years.
- Firm's resolution to take K M I containing the name
of the key-employees amount of cover. Plan & term.
Authorized person on the letter head of the firms
duly signed by the authorized person with stamp.
- Consent for assignment/surrender max. allowed KMI
will be restricted to 10 times of the salary of the
financial year as shown in form no.16.
- K M I is allowed only on the lives of active partners
according to the following conditions:-
- Average turnover for preceding 3 years should
be more then 5 crores.
- Max S.A. is restricted to share capital of key
man + last 3 years total net profit (Good will)
Requirements for 'Key Man Insurance':-
- Proposal form no.340 signed by the authorized person
of the company with the stamp of his designation below
- Duly filled special questionnaire.
- Certified copy of board resolution with
- consent to buy key-man insurance policy.
- giving authority to an invidual to act for and on
behalf of the company.
- M H R in specified form by marketing manager/sales
- There year's copies of audited balance sheets and
- Necessary medical report from the medical examiner.
- There year copies of I.T. returns of the company.
- Form to be filled by the key man.
Income tax rules :-
- In case of .S.B. is payable under the plans, will
be considered as the business income of the company
& will be taxable under section 28 (vi) of the
income tax ACT.
- Under section 31(1) of the income tax Act the premium
paid under key man insurance can be claimed by corporate
entities as bonafide business expenses.
- If the policy has been assigned to the key man,
the policy-proceeds including bonus will be taken
as profit under section 17 (clause) of the income
If the director of the company is the assignee under
the key man policy, it will be taken as 'income from
other sources' and will be taxable according to the
section 56 (2ic) of the income tax Act.
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