Keyman Insurance

Keyman Insurance (also called Key Person Insurance) is a life insurance policy that a company takes on the life of a key employee or executive whose skills, knowledge, or leadership are critical to the success and continuity of the business. The insurance is designed to protect the company financially in case the key person dies or becomes incapacitated.

Key Features:

Insured Person: A person whose absence could cause significant financial or operational loss to the company. Typically includes founders, directors, senior executives, or employees with specialized knowledge.

Policy Owner and Beneficiary: The company owns the policy and pays the premiums. The company receives the payout in the event of the key person’s death or disability.

Purpose: To compensate for financial loss due to the sudden loss of a key employee. Covers costs such as hiring and training a replacement, revenue loss, or maintaining investor confidence.

Tax Treatment (India): Premiums paid by the company are generally not tax-deductible. Insurance proceeds received by the company are usually tax-free as they are considered capital receipts.

Types of Coverage: Life insurance, critical illness cover, or disability cover depending on the role and associated risks.

Example: ABC Ltd. takes a Keyman Insurance policy of ₹5 crore on its founder-director, whose technical expertise is crucial. If the director passes away unexpectedly, ABC Ltd. receives ₹5 crore. The funds can be used to hire a replacement, cover operational losses, or reassure investors and lenders.