Key Man Insurance

7/29/2019 Key Man Insurance

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Key person insurance, also commonly called key man insuranceand key man insurance, is an important form of business insurance. Thereis no legal definition for "key person insurance". In general, it can bedescribed as an insurance policy taken out by a business to compensate that

business for financial losses that would arise from the death or extendedincapacity of the member of the business specified on the policy. Thepolicys term does not extend beyond the period of the key persons

usefulness to the business. The aim is to compensate the business for lossesand facilitate business continuity. Key person insurance does not indemnifythe actual losses incurred but compensates with a fixed monetary sum asspecified on the insurance policy.

An employer may take out a key person insurance policy on the life orhealth of any employee whose knowledge, work, or overall contribution is

considered uniquely valuable to the company. The employer does this tooffset the costs (such as hiring temporary help or recruiting a successor) andlosses (such as a decreased ability to transact business until successors aretrained) which the employer is likely to suffer in the event of the loss of akey person.

'KEY PERSON INSURANCE'

A life insurance policy that a company purchases on a key executive's life.

The company is the beneficiary of the plan and pays the insurance policy

premiums.

Also known as "key man insurance", "key woman insurance" or "business

life insurance".

'KEY PERSON INSURANCE'

Key person insurance is needed if the sudden loss of a key executive would

have a large negative effect on the company's operations. The payout

provided from the death of the executive essentially buys the company timeto find a new person or to implement other strategies to save the business.
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WHO CAN BE A KEY PERSON?A key person can be anyone directly associated with the businesswhose loss can cause financial strain to the business. For example, the

person could be a director of the company, a partner, a key salesperson, key project manager, or someone with specific skills orknowledge which is especially valuable to the company.

INSURABLE LOSSESThere are four categories of loss for which key person insurance can

provide compensation:

1. Losses related to the extended period when a key person is unable towork, to provide temporary personnel and, if necessary to finance therecruitment and training of a replacement.

2. Insurance to protect profits. For example, offsetting lost income fromlost sales, losses resulting from the delay or cancellation of any

business project that the key person was involved in, loss ofopportunity to expand, loss of specialised skills or knowledge.

3. Insurance to protect shareholders orpartnership interests. Typicallythis is insurance to enable shareholdings or partnership interests to be

purchased by existing shareholders or partners.4. Insurance for anyone involved in guaranteeing business loans or

banking facilities. The value of insurance coverage is arranged toequal the value of the guarantee.
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FAQ for Keyman Insurance Policy

1. What is keyman insurance ?

There is no legal definition. In general, it has the following features. Anemployer takes out an insurance policy insuring against loss of profitsarising from the death, sickness or injury of a key employee. The beneficiaryis the employer. In the case of a life insurance policy, it is a term insurance,covering the life of the employee within the term of the policy, with no other

benefits. The term does not extend beyond the period of the employee'susefulness to the employer. The purpose of taking out the insurance is tocompensate the employer for the loss of trading income that may result fromthe loss of the service of the key employee in case of death, sickness or

injury.

2. Are the premiums paid on the policy by the employer deductible for

profits tax purpose? Are the proceeds from the policy taxable?

The premiums are deductible The proceeds are taxable as trading receipts ofthe employer, being compensation for loss of profits.

3. If the employer is a sole proprietor or a partnership and the insured

person is the sole proprietor or a partner, are the premiums paid on the

policy by the employer deductible? Are the proceeds from the policy

taxable?

o, the premiums are not deductible. Even though the policy may be namedas a 'keyman policy', the Department would not accept that it is a realkeyman policy. This is because a keyman policy is applicable only in thecase of an employer and employee relationship. A sole proprietor or partneris not an employee. The premiums are regarded as private expenses. The

proceeds are not taxable.


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4. If the employer is a limited company and the insured person is a

director who owns substantial shares in the company, are the premiums

paid on the policy by the employer deductible? Are the proceeds from

the policy taxable?

o, the premiums are not deductible. The situation is, in substance, similarto the case where the insured keyman is the sole proprietor or a partner. TheDepartment considers that the purpose of the policy is to protect the value othe shares because the life or well-being of the director, being the keyman,would significantly affect the value of the shares. The premiums are of acapital nature. In this connection, generally a shareholding of 20% would beregarded as substantial.The proceeds are not taxable.

5. If the proceeds of a "keyman insurance policy" are payable to the

family members of the employee or the employer is contractually

required to pay the proceeds to the family members of the employee,

are the premiums paid on the policy by the employer deductible? Are

the proceeds from the policy taxable?

o, the premiums are not deductible. The purpose of the policy is not tocompensate the employer's loss of profits, but to protect the family of the

employee.

The proceeds received by the employee's family are not taxable.

6. If the policy is not a term policy, but is a life policy carrying a

surrender value or an endowment policy, are the premiums paid on the

policy by the employer deductible? Are the proceeds from the policy

taxable?

o, the premiums are not deductible. They are regarded as expenditure of acapital nature.

The proceeds are not taxable.

7. Sometimes, the policy may have an add-on element. For example, the

employer pays extra premiums on top of the normal premiums so that


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on the death of the employee certain benefits (e.g. one year salary)

would be paid to the family members of the employee. Are the whole

premiums paid on the policy by the employer deductible? Are the

proceeds from the policy taxable?

Only the normal premiums are deductible. The extra premiums are notdeductible.

The proceeds received by the employer are taxable. The proceeds receivedby the family members are not taxable.

8. If the policy is an investment-link policy, are the premiums paid on

the policy by the employer deductible? Are the proceeds from the policy

taxable?

The premiums for the investment portion are not deductible because they areof a capital nature. Only the premiums for the risk portion are deductible .An apportionment of the premiums is necessary.

The proceeds relating to the investment portion are not taxable. Theproceeds relating to the risk portion are taxable.

9. If the employer is required under the law to pay compensation to the

employee on injury or death etc. and the employer takes out an

insurance policy to cover such legal obligation (e.g. workers'

compensation under the Employment Ordinance), are the premiums

paid on such policy deductible? Are the proceeds from the policy

taxable?

Yes, the premiums are deductible, being normal business expenses. Suchpolicy is not a keyman policy.

The proceeds are not taxable.


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10. If the employer paid premiums on an insurance policy taken out for

the purpose of providing funds to any person (e.g. one of the partners),

in the event of death of an insured person (e.g. the other partner), to

acquire partnership interests or shares of a limited company, are the

premiums paid on such policy deductible? Are the proceeds from such

policy taxable? (Note: Normally, the main purpose of such insurance

arrangement is to prevent cessation of business by reason of the death

of an owner of the business.)

o, the premiums are not deductible. The premiums are regarded as privateexpenses or capital expenditure. The proceeds are not taxable.

KEYMAN INSURANCE PERSONAL GUARANTEES

What are keyman insurance personal guarantees for business risks?

This is keyman insurance for those who provide personal guarantees.Suppose a business takes out a loan. The lender will most likely require a

personal guarantee, a charge on their personal property, or other collateral.

This is particularly true of new businesses. If a guarantor should becomecritically ill or should die, lenders may call in the loan. Sometimes lendersrequire small companies to buy keyman insurance with the lender as

beneficiary. If not, and the business is in the position of having to repay theloan after a death at the company, keyman insurance can save the entire

business from failing. A small business's keyman insurance policy can bewritten specifically to pay off the loan, enabling the company to remain in

business. This policy is separate from any keyman insurance policy that hasthe business itself as beneficiary, which is highly recommended for new and

small businesses.


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What are keyman personal guarantees for professional indemnity?

Depending on the nature of the business, keyman insurance covering

professional indemnity may be a wise investment. Personal guarantees forprofessional indemnity covers the company in the event that claims are

brought against the company holding the policy because of some

professional negligent. Professional indemnity keyman insurance generally

covers the company in the event of a negligent act, or some sort of omission

or error, a breach of professional duty, or some form of civil liability. This

type of insurance is bought by businesses that provide advice to clients.

Coverage may be voluntary or involuntary. Involuntary coverage means that

the business is required by law to purchase the coverage. Types of

businesses that purchase insurance covering professional indemnity include

medical services, legal services, consulting, architecture, and financial

services and accounting. Medical and legal businesses are required to have

the coverage.

What are keyman personal guarantees for long term illnesses?

The death of a key employee is not the only event that can cause a small

business to go bankrupt. The long term illness of a key employee can cause

similar financial risk to a company. Some lenders may require that a

company borrowing money take out key employee critical illness coverage

with the lender as beneficiary so that the lender is protected in case of the

critical illness of a key employee. This policy would be separate from a key

employee critical illness policy that has the business as beneficiary. A new

or small business can fail if one of its key employees falls ill with a critical

illness. Insuring against this with a keyman policy will allow the company to

carry on in the absence of a key employee due to illness. The proceeds fromsuch a policy can be used to keep cash flow going, to hire a temporary

replacement, or to meet other expenses that would occur with the illness of a

key staff member.


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What are keyman personal guarantees for life and critical illness?

Sometimes a lender-required keyman insurance policy (with the lender asbeneficiary) will provide coverage in the event of the death or serious illness

of a key person. Because the long-term illness and absence of a key staffmember can wreak financial havoc at a small or new business, lenders mayask that critical illness be covered as well as the life of key employees. Thereare policies that cover both. Such a policy with the business as beneficiary isan extremely good idea with new or small businesses, because it will greatlylessen the chances that the business will go under should a key employee dieor fall ill and have a prolonged absence.

KEYMAN INSURANCE CRITICAL ILLNESS

What is keyman group critical illness insurance?

Group critical illness keyman insurance provides keyman benefits to a

company in the event that a key employee develops a critical illness.

Individual critical illness plans are becoming too expensive for many

companies to afford. Therefore group critical illness insurance pools risk,

allowing companies that couldn't afford individual keyman critical illness

insurance to buy this type of coverage.

Businesses must compare group critical illness policies carefully due to the

range of coverages and prices. Many insurance professionals recommend

buying a group critical illness policy as a standalone policy in order to take

advantage of better terms and rates and to allow pre-existing conditions to be

"grandfathered" in. Otherwise, employees with certain pre-exisiting

conditions could be denied claims. Two very important things to consider

with group critical illness coverage are the particular wordings in the policy

and the pre-existing conditions clause. Some 80% of denied claims are

because of pre-existing conditions, and the other 20% are because of failure

of the illness or condition to satisfy a definition in the policy. Finding a

policy with no pre-existing condition clause, and finding a plan with the

most generous policy definitions are two keys to getting the best in keyman

group critical illness coverage.
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How are keyman insurance critical illness policies written?

Keyman insurance policies for critical illness generally have exclusions

written in. For example, they may cover every type of cancer, with theexceptions of slower-growing forms of prostate cancer, lymphoma, and skin

cancer. It is actually quite rare for claims to be made against critical illness

policies, because most people who contract cancer do so after retirement

age, which is exactly the age at which critical illness coverage is canceled.

There are keyman critical insurance companies that engage in "policy

churning" in which they recommend that policies be reviewed every five

years to shop around for better deals. For many companies, this is a way for

financial advisors to receive regular commissions, which can be quite

lucrative. Other alternatives to this type of insurance include income

protection coverage, which will cover income if an employee must be off

work due to non-fatal and non-critical illnesses that would not be covered in

a critical illness policy.

How does someone get a keyman insurance critical illness quote?

It is easiest to get keyman critical illness quotes online, but be aware of what

the policies cover. The coverage is just as important as the cost of the

premiums. Some keyman critical insurance policies have especially limitedcoverage, with only eight of 10 diseases covered, as compared to the leader

in the critical illness insurance market, Swiss Life, which covers 38 types of

illnesses. Many insurers do not cover conditions like deafness, blindness, loss

of speech, and diabetes. AIDS and Parkinson's disease are two other

conditions generally not covered by the typical High Street insurance agent.

The term "total and permanent disabilities" is also found in keyman critical

illness quotes, covering people for any ailment that prevents a person from

working permanently. Pay particular attention to the wording on total andpermanent disabilities. Some policies state they will cover inability to

perform any occupation, and other policies state that they will cover the

inability to perform the job they have at the time the policy was purchased.

Clearly businesses benefit more when the employee is


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covered if he or she cannot do the job normally performed at the business,rather than if he or she must be so incapacitated that no work of any kind is

possible.

Tax benefits

A Life Insurance policy is one of the most preferred investment avenues in

India as it helps in tax planning. However, when you invest in a life

insurance policy, don't measure it in terms of "tax benefits"; measure it in

terms of "life benefits" that it has to offer.

Your life is your greatest investment and your family is your biggest asset.

And when you invest in a life insurance policy you ensure a financially

secured future for your loved ones. Hence, before you invest in anything,

invest in your life.

Your Life insurance policy offers you dual benefits:

Comprehensive financial protection against unforeseen events for your

family

Tax benefits on your monetary investments

By investing in a Life Insurance policy, you can avail the followingbenefits under the Income Tax Act, 1961:


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Deductions from gross income

Sec 80C

Deduction is available amounting to Rs. 1,00,000/-

The benefit for life insurance premium u/s 80 C is restricted to 20% of

the actual capital sum assured. Surrender of Plan before premium has

been paid for two years will result in reversal tax benefit.

80CCC

Deduction in respect of contribution to pension funds

Maximum Rs. 1,00,000/-

Surrender/Withdrawal will be subjected to tax.

Pension received will be subject to tax.

Sec 80 CCE

Under Section 80CCE, the overall limit for deduction u/s 80C, u/s

80CCC and u/s 80CCD is Rs. 1,00,000/-.

80D

Deduction in respect of medical insurance premium

Individual or HUF whether resident or non resident


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Premium can be paid by any mode other than cash

Premium paid out of income chargeable to tax.

For normal individuals the maximum deduction is Rs.15,000/- and

for senior citizens age 65 years and above the deduction is Rs.

20,000/-.

Additional deduction allowed for individuals for taking healthinsurance for parents as under:

Where parents are aged below 65 years Rs. 15,000/-

Where parents are aged 65 years & above Rs. 20,000/-

Exemption from the proceeds

Commuted pension: 10(10A)(iii)

One-third of the Value at vesting date would be tax-free


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10(10D)

Any sum received from Life insurance policy as maturity proceeds, death

benefits.

Proceeds of key man insurance is taxable

Single premium policies will be taxed as income in the year it is received

assuming the premium exceeds 20% of the sum assured.

An Insurance policy in respect of which the premium payable for any of the

ears during the term of the policy exceeds 20 % of the actual capital sum

assured will not be eligible for Sec 10(10D) benefit. This will not be

applicable for any sum received on the death of a person.

Disclaimer

The above are extracts from the Income Tax Act, 1961. Please note that

tax laws are subject to change and hence before placing reliance on the

above, the latest version of the above section should be checked up. It

should also be noted that the change in tax laws could have retrospective

effect also.

This information should be not be construed as tax, legal or investmentopinion from BSLI. BSLI would not be responsible in any manner for

decisions made on the basis of above information.

Please consult your tax advisor for specific suitability of taxation on

insurance products.


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Key Man Insurance Plans

These are the policies taken by a company to secure against sudden loss (bydeath) of its key employee(s) who may be senior managers or directors orother employees with the technical expertise that is valuable for thecompanys future and profits.

Generally the companies set off the premiums paid towards their Key Manpolicies against their business expenses. LICI, however does not assure oraccept any responsibility for the tax treatment of the premiums paid by

companies towards keeping their key man policies in force. Nor does it, inrespect of the tax treatment of the proceeds received from LICI towards thesurrender value or maturity value or claim by death of the key man. Theseare the issues to be resolved by the Companies and their accountants withthe Inland Revenue Department.

The following plans are available for Key Man Insurance

1. All Endowment Assurance Plans

2. All Whole Life Plans

3. Money Back Plans

4. Term Assurance Plans

1.Endowment Assurance Plans

LICI's Endowment Assurance plans allow you to target a specific long termgoal such as your retirement savings, childs higher educational needs, etc

and allow you to start saving immediately. The life insurance elementensures that the motive behind the savings plan is fulfilled even if the

policyholder is no more; the targeted sum along with vested bonuses is


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payable to the intended beneficiary in case of unfortunate death of the lifeassured during the term of the policy. Some of the highlights of theendowment assurance plans are:

World-wide risk coverage Low premiums, High returns and fixed

term of insurance Policy loan facility after 3 years.

Endowment Assurance Plan With Profits (Plan 614)

Life Insurance cover from ages 12 to 65 years. Age at maturity should be 75or less. Quantum of insurance cover depends up on ones income & health.

Premiums are payable throughout the term of the policy as per the agreed

mode

Basic Benefits:

Death BenefitPayment of the sum assured + the vested bonuses on deathof the life assured during the term of the policy.

Maturity BenefitPayment of the sum assured + the vested bonuses on thedate of maturity of the policy.

Terminal Illness Benefit 50% of the sum assured is payable if the lifeassured becomes terminally ill and the balance along with the vested

bonuses is payable on the death of the assured

Optional Benefits:

The optional benefits are available on payment of additional premiums overand above the basic premiums. These are not automatically available to allthe policyholders; they may be denied to some persons depending upon theirhealth, age, physical disability, occupation, etc. There is also a cap on themaximum benefit payable under all LICI policies of the life assured, puttogether:


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Rider Sum Assured Cap

Accident Benefit $200,000

Critical Illness Rider $100,000

Term Assurance Rider $100,000

Accident Benefit Rider package (accidental death benefit + total andpermanent disability benefit + premium waiver benefit)

Critical Illness Rider Benefit Term Assurance Rider Benefit

Endowment Assurance (Limited Payment) Plan With Profits (Plan 48F)

This plan is similar to Table 14 except that it offers more flexibility to itspolicyholder to pay his entire premiums within a limited (pre-determined)term called premium paying term. This plan is especially useful to those

persons having relatively shorter but highly rewarding careers or periods oftheir career such as people on special short term contracts, foreign

postings, fashion models, movie stars, etc.

Single Premium OptionChoice of Policy Terms (Years) 5,6,7,8,9,10, 15, 20, 30, 35, 40, 45, 50

Limited Payment Option

Policy Term Choice of Premium Paying Terms (Years)

15 1,5,10

20 1,5,10,15,

25 1,5,10,15,20

Basic Benefits: Same as under Endowment Assurance Plan With Profits(Table 14F)

Optional Benefits: Same as under Endowment Assurance Plan With Profits(Table 14F) subject to the following conditions:


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Accident Benefit Rider & Term Assurance Riders: These benefits areavailable for the entire policy term while the (limited payment including thesingle premium) riders premiums are collected along with the basic

premiums during the premium payment term itself.

Critical Illness Riders: Critical Illness Rider is not available for SinglePremium Options. In case of Limited Payment Options, the rider is availableonly during the premium paying term.

2.Whole of Life Plans

Whole of Life plans are ideally suited to those people who do run their ownbusinesses and hence do not ever need to retire. A whole of life plan can bean important component of ones estate planning. These plans are available

from ages 18 to 60 years. There are three types of Whole of Life Plans aslisted below. The following are the important highlights of LICIs whole oflife plans:

World-wide risk coverage Lower premiums, Highest Bonuses Policy

loan facility after 3 years.

'Long Life' -Whole of Life Plan with Profits (Table 2F)

The whole of life premiums are generally payable though out the lifetime ofthe policyholder and the policy monies (sum assured + vested bonuses) arereturned to his beneficiaries only on the death of the policyholder. However,

LICI provides an extra benefit to its Whole of Life policyholders it treatsthe policy as matured as soon as the life assured crosses 80 years of age(subject to the condition that the policy must have completed at least 40years from the date of commencement) and pays the sum assured + bonusesvested till that date; policy will be terminated on payment of the maturityvalue.


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Basic Benefits:

Death BenefitPayment of the sum assured + the vested bonuses on deathof the life assured.

Maturity BenefitPays the sum assured + bonuses vested till that date tothe policyholder after his 80th year of age or after the policy has completed aminimum duration of 40 years from the commencement date, whichevercomes later; policy will be terminated on payment of the maturity value.


bonuses is payable on the death of the assured.

Optional Benefits:Accident Benefit Rider package (accidental death benefit + total and

permanent disability benefit + premium waiver benefit).

Convertible Whole Life Plan With Profits (Table 28F)

A convertible whole life plan is available for ages between 16 and 50 yearsat entry. Under this plan the policyholder has an option to convert the WholeLife Plan into an Endowment Plan with a specified term (of 5 more yearsand upwards) after completion of 5 years.

This option may be exercised at the proposal stage itself or in the 5th year.On the other hand, if the conversion option is not exercised, the policycontinues as a whole life plan with premium payment ceasing at age 70.

Basic Benefits:

Death BenefitPayment of the sum assured + the vested bonuses on deathof the life assured.


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Maturity Benefit:

- If Conversion Option is Not Exercised: See under Long Life WholeLife Plan With Profits (Table 2F)

- If Conversion Option is Exercised: Maturity value is settled at the end ofthe chosen endowment term just as mentioned under Endowment AssurancePlan With Profits (Table 14F)

Terminal Illness Benefit: 50% of the sum assured is payable if the lifeassured becomes terminally ill and the balance along with the vested


Optional Benefits: The Accident Benefit Rider package is available onlyduring the premium paying term and not for the entire term of the policy.


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3.Money Back Plans (74F, 75F, 93F)

LICI's Money Back Policies are the best way to combine life insurance andliquidity. These are the most popular plans sold in Fiji. Periodical moneyback in lump sum can be reinvested in a more profitable scheme or simply

utilised for an emergency family need or fund that longstanding familyvacation. Money Back Plans are available between ages 12 and 55depending up on the term of the plan.

In all the money back plans, money is returned to the policyholder in theform of periodical survival benefits. Risk cover on the life of the assuredcontinues for full sum assured even after payment of survival payments. On

survival of the assured up to the date of maturity, the last survival benefit ispaid out along with the vested bonuses under the policy.

Table of Survival Benefits (% of the Sum Assured) payable under MoneyBack Plans:

Plan 74F 75F 93F

Payable After

5 Years 25% 20% 15%

10 Years 25% 20% 15%

15 Years 50% 20% 15%

20 Years - 40% 15%

25 Years - - 40%

BASIC BENEFITS:

Death BenefitPayment of the sum assured + the vested bonuses on deathof the life assured during the term of the policy.

Maturity Benefit Payment of the last survival benefit + the vestedbonuses on the date of maturity of the policy.


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OPTIONAL BENEFITS:

The optional benefits are available on payment of additional premiums overand above the basic premiums. These are not automatically available to allthe policyholders; they may be denied to some persons depending upon theirhealth, age, physical disability, occupation etc. There is also a cap on themaximum benefit payable under all LICI policies of the life assured, puttogether.

Rider Sum Assured Cap

Accident Benefit $200,000

Critical Illness Rider $100,000

Term Assurance Rider$100,000

Accident Benefit Rider package (accidental death benefit + total andpermanent disability benefit + premium waiver benefit)

Critical Illness Rider Benefit


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4.Term Assurance Rider Benefit

LICI's Aspire, the new childrens educational plan will help you realize your

dreams about your childs future. The plan aims at providing for your childs

secondary and tertiary educational needs. You can take out a policy underthis plan on your childright from the just born to 10 years of age and startsaving right away.

The Plan provides for returning of the sum assured under the policy in sevenannual survival benefits from the age 14 of the child assured under the plan.The policy matures on the childs 20 year of age; the last survival benefit is

payable along with the vested bonuses.The Maximum Sum Assured Available Under all Aspire Plans for each child

is $100,000.

BASIC BENEFITS

Survival Benefits: You can choose from one the following three cash flowsas annual survival benefits for your child. These survival benefits are meantfor meeting (partly or fully, depending upon the sum assured opted under thepolicy) the childs secondary and tertiary education. These survival benefits

fall due on the date of every policy anniversary falling due on or after thechilds attaining 14th year through 20th year.

Maturity Benefit: The policy matures on the policy anniversary falling onor after the childs attainment of 20th year of age. The last (seventh) survival

benefit is payable along with the vested bonuses under the policy as maturitybenefit.

Death Benefit:

Commencement of Risk: Risk cover on the life of the child assured underthe policycommences from the date of the policy anniversary falling on or after his orher attainment of 10th birthday.

Death after the Commencement of Risk: Full Sum Assured is payable


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along with the vested bonuseswithout deducting the survival benefits thatmay have been already paid out in case of the childs unfortunate deathafter the commencement of risk cover.

Death prior to the Commencement of Risk: In case of unfortunate deathof the child prior to the date of risk commencement (as explained above), the

premiums paid till that date are returned to the proposer.

OPTIONAL BENEFITS

The following optional benefits are available under the Aspire Plans onpayment of additional premiums. Both these riders cover the risk on the lifeof the proposer and are enormously useful to opt for.

Premium Waiver Benefit: Waives premiums in case of unfortunate deathof the proposer under the policy during the term of the policy. Proposer isthe sponsor of the policy. If he is no more, the child assured or his or herfamily may not be able to afford to pay the premiums. Waiver benefitensures that the educational needs of the child are met unhampered undersuch circumstances. However, there may be some restrictions regarding theage of the proposer for granting this rider cover.

Term Assurance Benefit: Pays an amount equivalent to 20% of the basicsum assured as a token of relief to the family in case of unfortunate death ofthe proposer during the term of the policy. There may be some restrictionsregarding the age of the proposer for granting this rider cover.

Smart Life 2 Plan (Plan 135F)

Welcome to our new investment oriented plan Smart Life-2. It is unlike anormal life insurance policy. Listed hereunder are its important features:

It is a single premium planthe entire premiums are paid upfront, atthe time of taking the policy; the value of the premium is well belowthe value of the policy or the sum assured under the policy.


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The policy is for a fixed term of 10 years. Guarantees an interest rate of 3% per annum (Guaranteed Additions)

throughout the policy term. In todays falling interest rate regime,

such a long term guarantee is rare and hence this is a huge attraction. Imagine a fixed deposit that also covers your life risk! For very

nominal extra premiums, you can opt for an additional term assurancecover as well as accidental death cover equal to the basic sum assuredunder the policy. This is the real clincher! One can enjoy a lifeinsurance cover for 10 years and up to $100,000 for just a fraction ofthe premiums that you would have to pay for a normal insurance

policy. Policy Loan facility is available after one year. Policy can also be

surrendered for cash after one year. Maximum sum assured under the policy is $100,000. Premium Rebates are available for high sum assured policies.

Conditions: Age at Entry: 20 to 60 years. Maximum Age at entry for optingTerm Assurance Cover: 50 years last birthday. Maximum Age at entry forAccidental Death cover: 55 years last birthday. Unlike the oher policies, theAccident cover under Smart Life 2 Plan does not include Premium Waiveror Total & Permanent Disability benefits.

Basic Benefits

Death Benefit: Payment of the sum assured + the guaranteed additionsmade till the date of death of the life assured during the term of the policy.

Maturity Benefit: Payment of the sum assured + the guaranteed additionsfor the entire policy term of 10 years.

Optional Benefits: The optional benefits are available on payment ofadditional premiums over and above the basic premiums. There may besome restrictions on the optional benefits depending upon health, age,occupation, physical disability, etc. There is also a cap on the maximum

benefit payable under all LICI policies of the life assured, put together.


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Accidental Death Benefit: One additional sum assured is payable if thedeath of the life assured under the policy takes place due to an accidentduring the term of the policy. There are some restrictions in granting this

benefit. As mentioned earlier, this benefit doesn't cover 'Premimum Waiver'and/or 'Total & Permanent Disability'.

Term Assurance Rider Benefit: One additional sum assured is payable ifthe death of the life assured under the policy takes place (accidental ornormal) during the term of the policy. There are some restrictions in grantingthis benefit.

Financial Daily from THE HINDU group of publications

Saturday, May 21, 2005

What's spooky about keyman

S. Murlidharan

THE concept of keyman insurance must be a product of the insuranceindustry's hard sell because the discerning, leave alone the cynic, finds itsrationaleguarding against the loss on account of death of key personsdifficult to stomach.


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The policy is of a piece with another insurance productthe loss of profitpolicy. But while loss of profits due to disruption can be reasonablyestimated, can one put a figure on the possible contribution to be made byindividuals to the fortunes of an organisation?

Family-owned enterprises and eponymous companies are especially fallingover themselves to be one up in the gameif your promoter has beeninsured for Rs 2 crore, I would insure mine for Rs 5 crore seems to be therefrain.

The very idea of keyman insurance raises some fundamental issues. Isanybody so indispensable to an organisation that his dissociation would

bring its activities to a standstill?

At any rate, the compensation received from the insurance company may atbest be enough to neutralise the loss to the organisation emanating out of thesad demise of the keyman for a year or two which makes the whole ideaillusory and evanescent. What would happen thereafter?

To be sure, the organisation would not have taken a policy to compensate forhis loss for all times to come. What happens if the keyman himself,untrammelled by the typical Japanese sentiments of life-long loyalty,switches to or allows himself to be ensnared by another organisation? Howwould the organisation be compensated in that event?

The definition of the term `keyman insurance policy' given by Explanationto Section 10(10D) of the Income-tax Act 1961 is as follows:

"... means a life insurance policy taken by a person on the life of anotherperson who is or was the employee of the first-mentioned person or is or wasconnected in any manner whatsoever with the business of the first-mentioned person... "

Section 28 (vi) for good measure makes it explicit that the proceeds of the

keyman insurance policy would be taxable as business income.

While this should be the logical culmination of a keyman insurance policy,the income-tax law also contemplates such policies being assigned in favourof the keyman himself when Section 17(3)(ii) thereof brings into the salarytax net the proceeds of such policies received by the keyman.


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The definition of the term `keyman insurance policy' given in the Act alsoraises many issues. Why should it countenance the possibility of anorganization taking a policy on an ex-employee or for that matter on anyonewho was even remotely connected with it?

The Indian experience has been that the keyman insurance policy is sooneror later assigned in favour of the keyman himself. This strikes at the veryroots of the policy.

If the organisation wanted to guard itself against the loss of a precioushuman resource, how can it be allowed to indulge in such mindless self-abnegation subsequently?

This then exposes the whole exercise as being right from the inception an

exercise in self-aggrandisement and tax saving.

The Act should be amended to disallow retrospectively the entire premiathus far paid on policies assigned to others.

Alternatively, fringe benefit tax (FBT) should be payable on such premiawhich turnout in hindsight to be for individual benefit as opposed to thealtruistic interest of the organisation.

In that event, Section 10(10D) must be amended to spare the estate of the

deceased keyman from tax liability on proceeds that has already been taxedin the hands of the employer either by way of disallowance or FBT.

This is to ensure that the same amount is not taxed twice overonce in thehands of the employer and again in the hands of the deceased employee.

Another farce that is being enacted by Indian corporates with regard tokeyman insurance polices is to use them as a short-term tax savingexpedient.

With the lowering of corporate tax rate effective assessment year 2006-2007,corporates have, hot on the heels of Budget 2005, liberally paid keymaninsurance premium to reduce their tax bill for the assessment year 2005-2006.

The policies would be surrendered the very next year notwithstanding theresultant tax liability on the proceeds thus received because the savings


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made in tax liability on account of the premia would be much more than thetax they have to pay on the surrender value the next year, thanks to thelowering of the corporate tax rate.

The IRDA is rightly incensed over this. But can it prevent corporates fromsurrendering the life policies or for that matter can it stop them fromassigning such policies to the keymen themselves?

The Act, too, cannot be amended for neutralising this one-off advantagescored by the corporates.


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All You Wanted To Know About Keyman Insurance

Key man insurance is a coverage that will protect company in the case of anuntimely death or disability of a top salesperson, executive or businessowner. Key persons are those within a business who are vital to thebusinesss profitability and continued financial success. There may be more

than one key person within any business.

Why to buy Keyman Insurance Policy?In case of an unfortunate eventuality to the 'keyman', two types of losses canarise for the company -(a) Loss arising from profit reduction for the company and(b) Costs for the company in replacing the keyman.

Eligibility for keyman insuranceThe Keyman Insurance (KMI) is allowed to the employee, if he satisfies

the following condition -1. The keyman should hold less than 51% shares of company.2. The total number of shares of the company held by the keyman and hisfamily should be less than 70%3. The keyman should be literate.

How to decide the Insurance Worth of a Keyman?

The Sum Assured under key man insurance can be decided by using thefollowing methods -A. The max S.A. for key man insurance is restricted to 10 times of thekeymans compensation package (total salary + annual bonuses of a regular

nature and paid a fixed percentage of salary + various other perquisites suchas furnished houses, utility bills, car and commission out of net profit) Thenotional value of perquisites is taken as 30% of the gross annual salary.B. Method of gross profit 3 times of the average gross profit (profit before
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depreciation) of three years.C. Method of net profit 5 times the average net profit (profit after allowingdepreciation & taxation) of last 3 years. On the basis of above mentionedmethods we can decide the max. Sum assured (S.A.) for key man insurance.

Key man insurance to employee of partnership firms1. Max allowable KMI cover to partnership firms - 3 times of average gross

profit of 3 year. Or 5 times of average net profit of 3 year, whichever islower.2. The max. Amount of cover will be distributed among the key partners.3. Key Man Insurance can be given on the lives of more than one partner.


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Advantages of keyman insurance to the company

1. In case of death of a keyman the company gets money to cope up with theloss

2. Any company buying keyman insurance for its employee can claim adeduction for the premium paid for the policy as a business expense underSection 37(1) of the Income Tax Act.

3. No advance intimation/approval is necessary from the Income Tax

authorities to claim deduction of insurance premium payment.

4. The fact that the employee/directors life is insured for a large sum that

will be paid by insurance company to his family if he dies, it is bound toensure loyalty and avoids employee turnover.

5. For the executives earning high salaries, this policy can be given as a hikein salary and save on the tax outgo.

6. It helps the company in its tax planning.

7. The directors can also safeguard their immediate family from gettingaffected by the vagaries of the industry and the various business cycles thatcompany has to face.

8. Insulate the risk of financial loss against loss of a Keyman.

9. Interest on loans taken against a keyman insurance policy may also beallowed as business expenses.

10. Premiums paid by the company on the life of a keyman would not betreated as perquisites in the hands of such a keyman when the companys


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request is accepted by the assessing authority.

11. Keyman Insurance policy is a positive measure to improve the retentionof the keyman in the company.

Disadvantages of Keyman insurance

The amount on claim or maturity under a keyman insurance policy is notexempt under Section 10 (10D) of the Income Tax Act if the company is

paying the premiums. However, in case the policy has been assigned to

the keyman and the keyman is paying the premiums, then the

claim/maturity proceeds are exempt under Section 10 (10D).

If the policy, after attaining surrender value, is endorsed to the employee,then the surrender value/maturity value is chargeable to tax under Section

17 of the Income Tax Act. This is because it is treated as 'profit in lieu of

salary' in the hands of the employee.

As is evident, the demerits of keyman insurance are more tax-oriented than

insurance-oriented. Which means that buying keyman insurance is still

beneficial from the company's point of view.

This is primarily because of the significant role that a keyman plays in

keeping a company rolling. It pays to insure the keyman to protect thecompany from any contingencies to the keyman.

Also, the policy is beneficial from the keyman's point of view. This is in

case the company decides to endorse the policy to the keyman. This can be

done only after a surrender value has been attained, which usually takes 2-3

years (depending on the insurer).

In doing so, the keyman benefits, by having an insurance policy in his name

the initial premiums of which, have already been paid by his company.

And although he might have to pay tax on surrender value, if endorsed in the

early years when the surrender value is low, the tax liability of the keyman is

reduced to a great extent after accounting for the premiums paid by his

company.


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Objective

If creates a cost-effective funding scheme that provides a business entity

with a lump sum cash to deal with the adverse consequences in the event

that the significant and valuable employee(s) is diagnosed with a critical

illness , total and permanent disability or death.

Keyman insurance: It pays to be insured!

"Life insurance isn't meant for people who die. Life insurance is meant for

people who live." Who said this doesn't really matter, what matters is that

there is an important lesson to learn from this.

The basic tenet of life insurance is to indemnify the survivors against

financial loss. 'Keyman' is one such type of insurance.

Keyman insurance can be defined as an insurance policy where the proposer

as well as the premium payer is the employer, the life to be insured is that of

the employee and the benefit, in case of a claim, goes to the employer.

The 'keyman' here would be any person employed by a company having a

special skill set or substantial responsibilities and who contributes

significantly to the profits of that organisation.

In case of an unfortunate eventuality to the 'keyman', two types of losses can

arise -- (a) Loss arising from profit reduction for the company and (b) Costs

for the company in replacing the keyman.

Various types of life insurance policies are available in the market today.

Both endowment policy and term policy can be bought under keyman

insurance. Some companies even offer ULIPs under keyman insurance.

Let us take a brief look at the pros and cons of buying keyman insurance.


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Plans Allowed under Key man Insurance:

Anmol Jeevan I Amulya Jeevan I

Objective Of Key man Insurance (KMI):

The objective of keyman Insurance is to protect the company from the

adverse financial effect by the Key Employee or Key Directors death by

making funds available to the company in his absence. The companys

progress and profit, usually depends upon the vital decision or technical

expertised skill, knowledge, entrepreneurial vision of its Key Director or

Key Employee, particularly in this competitive Globalised marketing

Environment.

Today companies expansion diversification, and setting up policy depends

upon its far sighted vision, decision, technical know-how of the Key

Director and Key Employee and thats required to be secured by

purchasing Key man Insurance for making funds available for promoting,

recruiting in the absence of Key-man. This policy is specially purchased by

the company (both Pvt. and Ltd. Companies.) for the life of its most

important Key person.

Benefits to the Company:-

Insulate the risk of financial loss against loss of a Keyman. Premiums paid under keyman insurance may be fully allowed as

Business Expenses under Section 37(1) of the Income Tax Act, 1961,

subject to satisfaction of the assessing authority.

Interest on loans taken against a keyman insurance policy may also beallowed as business expenses.

Premiums paid by the company on the life of a keyman would not betreated as perquisites in the hands of such a keyman when the

companys request is accepted by the assessing authority.

Keyman Insurance policy is a positive measure to improve theretention of the key man in the company.
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Eligibility for keyman insurance:

Thekeyman insurance (KMI) is allowed to the employee, if he satisfies the

following condition;

The keyman should hold less then 51% shares of company.

The total number of shares of the company held by the keyman andhis family should be less then 70%

The keyman should be literate.Factors to be considered for insurance cover on key-mans life.

Key-mans qualification. Experience in different fields. Previous record and service period in the organization. Is he the only key-man in the specific field or otherwise?

Key Points:

Proposerthe company Term- 10-15 years on the basis of retirement age or service contract. Accident benefit and nomination are not allowed. Assignment is allowed only in case of absolute assignment in favour

of the key-man if he leaves the job of the company.

In the standard policy forms following changes should be done whileissuing the key-man insurance.

1. Delete the words nominee under section 39 of the insurance act.2. Write the name of the life assured and proposer.3. Place the following endorsement on the policy:-4. either absolute assignment in favour of the life assured (KM) or

surrender to LIC for its cash value.

Max. age at entry65 years. Maturity age75 years.

Keyman Insurance proposal requirements:

1. Copy of Memorandum & Articles of Association2. Copies of Audited Balance. Sheet and P&L A/Cs for previous 3 years
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3. Certified true copy of board resolution passed in the Meeting of Boardof Directors containing following information:

Sum assured desired

Name & sig. of the person who is authorised to complete proposalpapers

The use of seal of the company4. Key man Questionnaire is to be completed in the persons hand format and

the same is to be signed by the authorised person under the seal of the

Company

5. Copies of I.T.returns of the Co. for proceeding 3 yrs

6. Consent for the endorsement to be placed on the policy

7. Revised Key Man Questionnaire annexed is to be attached.The S.A. under key man insurance can be decided by using the

following methods:-

The max S.A. for key man insurance is restricted to :-10 times of the keymans 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:- 3 times of the average gross profit (profitbefore depreciation) of three years.

Method of net profit:- 5 times the average net profit (profit afterallowing depreciation & taxation) of last 3 years. On the basis of

above mentioned methods we can decide the max. Sum assured (S.A.)

for key man insurance.

Note:- no key man insurance (KMI) can be issued in case of companys

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


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(ii) max .S.Ato be treated at par with public Ltd. companies

(iii) no. of shareholders/employeesmore 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 present.

Key man insurance to employee of partnership firms:-

1. Max allowable KMI cover to partnership firms3 times of average gross profit of 3 year. Or

5 times of average net profit of 3 year, whichever is lower.

2. The max. amount of cover will be distributed among the keypartners.

3. Key Man Insurance can be given on the lives of more then onepartner.

Income tax rules :-

In case of S.B. is payable under the plans, will be considered as thebusiness 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 underkey man insurance can be claimed by corporate entities as bonafide

business expenses.

If the policy has been assigned to the key man, the policy-proceedsincluding bonus will be taken as profit under section 17 (clause) of the

income tax Act.

If the director of the company is the assignee under the key manpolicy, 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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Case study

ON KEY MAN INSURANCE

Dave is an IT Consultant for a furniture supply company, Samuels

Furnishings Ltd. He has specialist knowledge relating to the companys IT

systems, and understands the accounts and administrative systems of product

supply companies. The staff at Samuels Furnishings rely on Dave for

ongoing maintenance of their IT systems, and to fix any IT problems that

they encounter so that they can carry out their roles. Unfortunately, Dave has

a major heart attack and therefore has to finish work.

Samuels Furnishings took out a keyman insurance policy, which included

critical illness benefit for an amount of 800,000. Because Dave is named as

one of their key people, and his illness is defined by the policy as a critical

illness, they received a payout for the sum of 800,000. This enabled them

to source a replacement from the freelance market and cover recruitment

costs and his salary until they could find a permanent replacement or until

Dave was fit to return to work. They were also able to pay for temporary

staff to help out with the administrative backlog caused by system

downtime.

If Samuels Furnishings hadnt had Keyman Insurance, they would have had

to find the extra funds needed for replacement staff. This would have

severely affected the companys cash flow, and they may have had to take

out an additional loan to finance it. This would have left them short of funds

for other areas of the business and if they couldnt afford to meet the

payments on the loan the company might have been forced into liquidation.

The amount of coverage available for key person insurance will be

dependent upon the financial risk associated with the reason for buying

the protection. Typical reasons for buying key person insurance

include: key employee insurance, business loan indemnification, funding


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buy-sell agreements and executive benefits. In each of these cases, the

financial justification requirements are different. The general guidelines

for each are described below:

1. Key Person Insurance

Income including bonuses Niche experience of the key person Their contribution to earnings Education and prior work history Background of the company Company revenues, income and net worth

2. Business Loan Indemnification

History of the business Reason for the loan Terms of the loan Collateral Company revenues, income and net worth

3. Funding Buy-Sell Agreements

Ownership percentages Copies of the actual agreement Company valuation Company financial documentation

4. Executive Benefits

Key executives income including bonuses Copy of the plan documents How the benefits were determined Company financial documentation


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Regardless of how much insurance is applied for or requested by the

business, an insurance company will approve a key man policy based on

their interpretation of the true risk exposure. Providing the detailed financial

information above allows the insurance company to accurately assess the

facts and make the best insurance offer. Please contact MEG at (877) 583-

3955 to discuss your special circumstances or additional questions on

financial underwriting.

Documents

Key Man Insurance