Keyman insurance policy – detailed analysis

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:

1. Directors of a Company

2. Key Sales People

3. Key Project Managers

4. People with Specific Skills

Advantages of keyman insurance to the company :

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

2. 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.

3. No advance intimation/approval is necessary from the Income Tax authorities to claim deduction of insurance premium payment.

4. It also helps the company in its tax planning.

5. 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.

 Some Important points about Keyman insurance policy

• Any sum received under a Keyman insurance policy is not exempt under section 10(10D)
• Maturity proceeds of keyman insurance policy which has been assigned to a person during the term of the policy is exempt whether with or without consideration, by including the assigned policy within the definition of “Keyman insurance policy”.
• 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.

Republished with Amendments