Life Insurance

What is Key Person Insurance? All You Need To Know

We all know and acknowledge that Insurance plans are required for an earning member of the family, one of the most important members of the family who provides for financial stability to your family…

No votes have been submitted yet.

We all know and acknowledge that Insurance plans are required for an earning member of the family, one of the most important members of the family who provides for financial stability to your family, without whom the family is not complete.  Did you know that the Key Person can also purchase life insurance, also called the key man, as this is the individual protecting the business. The business may get impacted in case your most experienced team member is no longer around?

Your key person is responsible for the growth of your business. In his absence, you may find it difficult for your business to sustain itself. You, as an experienced and skilled businessman yourself, work hard to grow your business; without your right hand, your key man, your work can suffer a substantial loss. Without the presence of the key person, the business will lose out on technical know-how. If you are often worried about such a scenario, then probably Key Person Insurance is what you need.

What Is Key Person Insurance?

Key Person Insurance or key man insurance policy offers coverage taken by an employer for his employee's life. The employer is the policyholder, and he is the one who pays the premium; however, the insured member is the employee. The insured member is an employee regarded as a significant contributor to the business's successful functioning.

The Key Person Insurance policy has a specific term, during which if the insured member dies, the policyholder, the employer, receives the death benefit. This benefit helps the employer deal with the financial loss that he would suffer because of the insured's death.

How Does Key Person Insurance Work?

Key Person Insurance is a term plan insurance that is available for a specific number of years. In most cases, the policy continues as long as the employee is serving. It ends when he reaches the age of retirement. As a businessman/ entrepreneur, you may want to ensure your critical workers are under Key Person Insurance.

Let me explain with an example. Suppose you run a garment business and your employee Manoj looks after most of the administration. Manoj, who is 30-years-old is your key person. You are confident that he will work for you until he retires, at the age of 60. Therefore, you would purchase Key Person Insurance for Manoj when he is 30 for 30 years. In case you have a fixed employed term with Manoj of, say 20 years, you can have an insurance policy for a term of 20 years only.

Unfortunately, if Manoj passes away during the policy term of 30/ 20 years respectively, you, the policyholder, would receive the death benefit. But as this is a term plan, if Manoj survives the tenure of the policy, no benefit would be payable.

What are the Benefits of Keyman Insurance or Key Person Insurance?

For most businesses, a key man insurance policy or key person Insurance policy can prove to be very beneficial; here are five reasons why one should consider Keyman Insurance today.

  • Financial Stability: This is the primary reason for the purchase of Keyman Insurance. In case there is an untimely demise of the keyman, the business can recover from the financial loss with the support of the insurance.
  • Encourages Employees: This type of insurance policy demonstrates the importance of the key employees and plays a significant role in boosting their morale. This is a way of saying how important this employee to the business is.
  • Back-Up Plan: The untimely and unfortunate death of the keyman would not push your company's stock prices haywire. The Key Person Insurance pays back the Sum Assured to hire new talent and plan to replace the employee; hence this is a great backup plan for budding businesses.
  • Tax Benefits: The premiums that the employer pays are considered business expenses and thus are eligible for tax benefits that can be claimed against your company's income.
  • Avoid Liabilities: In case of any loans on the key person’s guarantee, untimely death would cause a substantial liability to the business. Proceeds of the Key Person Insurance Policy would help in avoiding such a financial crunch.

Do I Need to Buy Key Person Insurance?

Yes! However, if you are still contemplating buying a key man insurance policy or Key Person Insurance but still aren’t sure, ask yourself the following Four Key Questions; they may help you in making the decision today:

  1. Is the reputation of your business linked to the key person of the business such that the business continuity might suffer in his absence? Yes/No
  2. Is the key person's financial liability on the business linked to a possible loss? Yes/No
  3. Will this person's death cause a major financial loss to your business or bring an end to it? Yes/No
  4. Is your business in a partnership, where each partner would want to buy the other partner’s share in case of his untimely death? Yes/No

If you answered Yes to any of the questions given above, you should consider investing in a key man insurance policy today!

What Points Should I Remember When Buying Key Person Insurance?

Given below are seven important things you need to remember when purchasing a Key Person Insurance policy:

  1. The policyholder or the business company itself is the nominee or beneficiary of this policy
  2. Death benefits the business/ company receive are taxable; this is not so in the case of individual life insurance policies. In individual life insurance policies, the death benefit is completely exempted from taxes 
  3. Key Person Insurance is a term insurance plan. The investment is so high that the damage to it or absence will hurt your finances.
  4. The premium is paid by the employer; the employee neither pays the premium nor receives any policy benefit
  5. Make sure that you find out the key man insurance cost before finalising the plan
  6. The policy shall be cancelled in case the keyman has to leave the company/ business
  7. Companies that are running at losses cannot, however, purchase Key Person Insurance to avoid any moral hazard

Conclusion:

Key Person Insurance, also called Keyman Insurance, offers a death benefit to your business in case of the death of the keyman/ key person. This money can come in very handy when dealing with the financial loss caused by the person's death. You can use it in the recruitment and training of a replacement for the key man.


FAQ:

1. Can I add any Riders to my key man insurance policy?
No riders can be purchased along with Keyman life Insurance.

2. Under the key man policy, does the family receive any benefits?
No, the family/ dependents of the insured member do not receive any benefits.

3. What Tax Implications apply to the employer under the Key Person Insurance?
When Key Person Insurance or Keyman insurance is purchased, the following tax implications are applicable for the employer:

  • The premium that you pay as the employer is regarded as a business expense and is deducted from the company’s taxable profits under Section 37 (1) of the Income Tax Act
  • The company will receive the death benefit, and it would be taxable, as it would be considered as an income

4. What Tax Implications apply to the employee under the Key Person Insurance?
The following tax implications are applicable for the employee:

  • The employer pays the premium of the Key Person Insurance. Hence the employee does not incur any liability.
  • The death benefit received at the keyman's death is received by the policyholder/ the company. Hence, the employee's family members or his dependents do not incur any tax benefit/ liability.

5. Who is the owner of a key person's life insurance policy?
A key person insurance policy is a life insurance policy purchased by a company for the life of an owner, a top executive, or another individual deemed critical to the business. The company is the policy's beneficiary and pays the premiums.

6. Are there any tax benefits in Key Man insurance?
Yes,, but the tax implications of a Keyman insurance policy vary depending on the premiums paid and the benefits received.

7. Who needs critical person insurance?
An employee considered critical for a company is eligible for key person insurance.