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

Keyman insurance Policy

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. 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.

5. The company can also raise loans on the policy from LIC at 12 per cent per annum.

6. 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.

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

8. At the same time, it also helps the company in its tax planning.

9. 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.

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

11. Interest on loans taken against a keyman insurance policy may also be allowed as business expenses.

12. 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.

13. Keyman Insurance policy is a positive measure to improve the retention of the keyman in the company.

Disadvantages of Keyman insurance :

1. 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).

2. 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 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.

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.

Republished with Amendments

More Under Income Tax

30 Comments

  1. Himanshu Talwar says:

    Query : If Key man dies under key man policy, It will be taxable in hands of company, My question if company use x gratia and transfer 100% of money to legal heir or nominee , will it be tax free in hands of nominee.

  2. vijaya lakshmi says:

    HSP,a LLP TAKEN KEY man insurance policy on life of its managing partner.policy matured on 13th sep 2017 and amount of 75lakhs was paid by insurers to hte managing partner.the amount so received on maturity of the policy by the managing partner.

  3. KUMAR says:

    A KEYMAN INSURANCE WAS TAKEN IN 2004 AND 10 YRS PREMIUMS PAID BY EMPLOYER. IN THE 11 TH YEAR THE POLICY WAS ASSIGNED IN FAVOUR OF EMPLOYEE. TAX WAS PAID BY THE EMPLOYEE ON THE SURRENDER VALUE. POLICY MATURED IN 2016. ARE THE PROCEEDS TAXABLE NOW? WILL THE MATURITY VALUE BE TREATED UNDER 10 10 (D) SINCE TAX ALREADY PAID ON SURRENDER VALUE. PLEASE CLARIFY
    KUMAR. kumar140851@gmail.com 9490796920

    1. Thilagaraj Jayapaul says:

      The Maturity will be tax free, since the employee has already paid when the reassignment done.
      Now the customer started paying the premium as an individual policy

      So 10(10D) will apply, means the maturity will be taxfree

  4. Sumathy says:

    Sir,
    The insurance worth of a keyman is calculated as follows …
    5 times the average net profit of the company from the past 3 yrs.
    2 times the average gross profit of the company in the past 3 years
    10 times the annual salary of the keyman who is insured

  5. Shakti Dusad says:

    Dear Sir,

    I wish to know that my employer had taken the Keyman Policy in the year 2007-08 and due to some financial crunches I had to surrender this policy in year 20014-15. This policy was assign to me, but I don’t remember in which year it was done. All the premiums were paid by my employer only.
    On receiving the surrender value amount some tds was deducted.

    I wish to know the following

    Do I need to pay some Income Tax on the surrender value amount received ?
    If you then on what amount the income tax is to be paid.
    and will it be possible to adjust the TDS against the tax payable.

    If not income tax is payable then is it possible to get the refund of the TDS deposit.

  6. Ravi says:

    Hi anyone is interested in business insurance towards keyman , employer employee etc pls feel free to reach me or write to me, I am business consultant my no 8008791010 residing at Hyderabad .

  7. Max Life Ramandeep Singh says:

    what is the latest status of sec 10 (10d), under employer employee scheme, if the money comes in the form of claim. will it be taxable in the hands of legal heirs even if it is passed on to them by the employer as ex gratia. wanted to know about the latest tax implications of this money to the legal heirs.

  8. Ramandeep Singh says:

    what is the latest status of sec 10 (10d), under employer employee scheme, if the money comes in the form of claim. will it be taxable in the hands of legal heirs even if it is passed on to them by the employer as ex gratia. wanted to know about the latest tax implications of this money to the legal heirs

  9. harshitha says:

    Dear sir,
    The Keyman Insurance Policy is assigned in the favor of the Keyman after paying the premium by the company for the 7 years. It is clear that at the time of assignment, the surrender value would be taxable as perquisite in the hands of the Keyman. The Maturity Proceeds of the Policy would be received after the 3 years as the total term of the policy is 10 years. In the remaining 3 years the premium of the policy would be paid by the Keyman himself.

  10. Sanjeev Mayer says:

    Need following clarification regarding keyman insurance
    1. What are the latest amendments as of today?
    2. If the Keyman expires
    a) Who will get the claim – the company or the nominee of the deceased?
    b) Shall the claim be taxable

  11. Kotak Life ARVIND says:

    Is Key Man policy transferable?.i.e: if the key person leaves the company, can this – existing policy be transferred to the new key man ?

  12. V ABHISHEK says:

    A client of mine is looking at takin up a keyman insurance policy for its managing director. kindly provide me the latest update,Please guide me about the benefit of keyman employer & employee’s insurance policy of taxation benefit for public ltd company and IRDA Norms also

  13. pankaj shah says:

    dear sir,very helpful article.
    please help me to understand if company has keyman policy since 2004 and it is not assigned to director.now if company transfer 80% fund value to buy new policy on the name of keyperson than in this case how will be tax implentation to company and keyperson

  14. santosh kumar singh says:

    thanx a lot sir……

    reallly it’s so helpful,
    but one thing is that how can premium amount paid by keyman himself, it’s a keyman insurance policy which is done by employer and premium amount also paid by employer and the same is allowable expense for employer u/s 37 of the Act.

  15. pawan kejriwal says:

    can aby one provide me the citation of the recent delhi high court judgement on keyman insurance policy taxataion in the matter of Escorts Heart Institute

  16. MK GUPTA says:

    Dear Sir

    Thanks for this insightful article. Please let us know, if: –

    The Keyman Insurance Policy is assigned in the favor of the Keyman after paying the premium by the company for the 7 years. It is clear that at the time of assignment, the surrender value would be taxable as perquisite in the hands of the Keyman.
    The Maturity Proceeds of the Policy would be received after the 3 years as the total term of the policy is 10 years. In the remaining 3 years the premium of the policy would be paid by the Keyman himself.

    As per the above said Article it would be exempt as the premium is paid by the Keyman after the assignment of the policy.

    So could you please provide us with any case Law of the ITAT, High Court, Supreme Court supporting the view that the Maturity Proceeds of the Keyman Insurance Policy are exempt.

    Regards
    MK Gupta
    988507436
    CAMKGUPTA@ICAI.ORG

  17. sendy says:

    Dear sir,
    Please guide me about the benefit of employer employee insurance policy of taxation benefit for public ltd company and IRDA Norms also.

    Thanks
    Sandeep jain

  18. ram g l says:

    Please favourt me Keyman policy tax treatment in case it is assign in favour of keyperson before maturity on resignation of keyman from proprietory concern. Who will pay the tax & on what amount. Whether maturity proceeds receivable by key man are tax free or taxable on maturity

  19. Ashu Sharma says:

    A client of mine is looking at takin up a keyman insurance policy for its managing director. kindly provide me the latest update, irda guidelines and tax treatment for the same

Leave a Comment

Your email address will not be published. Required fields are marked *