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 organization.
Who
can be a Keyman?
Anybody
with specialized skills, whose loss can cause a financial strain to the company
are eligible for Keyman Insurance. For example, they could be:
-Directors of a Company
-Key Sales People
-Key Project Managers
-People with
Specific Skills
Advantages
of keyman insurance to the company :
- In case
of death of a keyman the company gets money to cope up with the loss
- any
company buying keyman insurance for its employee can claim a deduction for
the premium paid for the policy as a business expense under Section 37(1)
of the Income Tax Act.
- No
advance intimation/approval is necessary from the Income Tax authorities
to claim deduction of insurance premium payment.
- This
policy can be used as either an extra superannuation benefit or an
ex-gratia payment to the key employee during the service period. If the
company receives the proceeds on maturity, then they are taxable.
- The
company can also raise loans on the policy from LIC at 12 per cent per
annum.
- The fact
that the employee/director’s life is insured for a large sum that will be
paid by LIC to his family if he dies, it is bound to ensure loyalty and
avoids employee turnover.
- For the
executives earning high salaries, this policy can be given as a hike in
salary and save on the tax outgo.
- At the
same time, it also helps the company in its tax planning.
- The
directors can also safeguard their immediate family from getting affected
by the vagaries of the industry and the various business cycles that a
company has to face.
- Insulate
the risk of financial loss against loss of a Keyman.
- Interest
on loans taken against a keyman insurance policy may also be allowed as
business expenses.
- Premiums
paid by the company on the life of a keyman would not be treated as
perquisites in the hands of such a keyman when the company’s request is
accepted by the assessing authority.
- Keyman Insurance policy is a positive measure to improve the retention of the keyman in thecompany.
Disadvantages
of Keyman insurance :
- The
amount on claim or maturity under a keyman insurance policy is not exempt
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.
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 key man 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.
Treatment
of Payments – for the Company
·
All claims – maturity, surrender or
death benefit received by the company are taxable.
·
In case of the keyman retiring, the
company may surrender the policy for its cash value, or assign the policy
absolutely in favour of the keyman.
·
In case of an assignment, the surrender
value of the policy at the time of assignment may be treated as perquisite in
the hands of the employee, and taxed accordingly by the assessing authority.
Insurance
Worth of a Keyman :
The
insurance worth of a keyman is the lower of:
·
5 times the average net profit of the
company for the past 3 years
·
2 times the average gross profit of the
company for the past 3 years
·
10 times of the keyman’s annual
compensation package.
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