Introduction
Protecting your business from unexpected setbacks is vital, and as a business owner, you understand the importance of having a safety net. However, have you considered what would happen if your key employee unexpectedly passed away or became unable to work? That's where Keyman Insurance comes in - providing peace of mind and financial security for your business when you need it most.
In this article, we will delve into the details of the keyman insurance policy, exploring its benefits, drawbacks, and how to determine if it's right for your business.
What is a Keyman Insurance Policy?
A keyman insurance policy, also known as key person insurance, is a type of life insurance policy that a company or organization takes out on the life of one or more of its key employees or executives. The business, known as the proposer or premium payer, pays the premiums for the policy, and in case of the insured employee's death or disability, the policy pays out a lump sum to the business. The purpose of the policy is to provide financial protection to the company in the event of a key person's death, disability, or critical illness.
The lump sum paid out by the policy can be used by the business to cover the financial losses resulting from the loss of the key employee. This can include costs such as recruiting and training a replacement, lost profits, and debts or loans that may become due.
It is important to note that the keyman insurance policy is not intended to benefit the insured employee or their family. The policy's sole purpose is to protect the business from financial loss in the event of a key employee's unexpected death or disability.
Heads Up: It takes an average person up to 5 hours to read & analyze a policy, and 10 hours or more to compare different plans and make a decision.
This is why we propose a better alternative - taking a 30-minute FREE consultation with Ditto’s certified advisors. We have a spam-free guarantee, and we’ll never push you to buy a plan. Don’t delay this - we have limited slots every day, so book a quick call here before they run out.
Features of Key Man Insurance
Let's explore the features that make this insurance a vital investment for any company!
Insurable Interest: The keyman insurance policy must have a valid insurable interest, which means the company or the business owner must have a financial interest in the employee's life or ability to work.
Tailored Protection: Key man insurance policies can be customized to meet the specific needs of the company, including the amount of coverage, the length of the policy, and the type of coverage required.
Affordable Premiums: The premiums for a keyman insurance policy can vary depending on the age, health, and occupation of the key employee, as well as the coverage amount and policy term. The premiums are generally tax-deductible for the company, making it a cost-effective way to protect the business.
Policy Pivot: Key man insurance policies can be renewed at the end of the term, or the company may choose to convert the policy to permanent life insurance.
Secret Safeguard: Keyman insurance policies are confidential, and the company does not need to disclose the policy or its details to anyone outside the company.
Policy Exclusions: The keyman insurance policy may have certain exclusions, such as suicide, self-inflicted injury, or engaging in high-risk activities. It is important to review the policy carefully to understand any exclusions that may apply
Sum assured: The maximum sum assured under Key Man Insurance is the lesser of:
- Three times the average gross profit of the company over the last three years
- Five times the average net profit of the company over the last three years
- 10 times the annual compensation of the keyman
Some basic eligibility requirements:
Protecting your business and its future success requires careful consideration of key stakeholders, especially when it comes to the keyman - the person who holds significant influence and value in your company. But did you know that there are specific guidelines to follow when purchasing keyman insurance? From share limits to nominee options, it's crucial to understand the requirements to ensure your business is fully covered. Here's what you need to know
- The keyman should not hold more than 51% of the company’s shares. Also, the total shares held by the keyman and their family should exceed 70% of the shares of the company.
- Only term insurance policies can be bought as Keyman Insurance.
- The company can be the only nominee.
- The business must provide evidence to support the claim that the keyman plays a crucial role in the operation.
Advantages of Keyman Insurance Policy
Keyman Insurance policy not only provides a safety net for unexpected events but also offers attractive benefits for both the company and its key employees. Let's explore the advantages of the Keyman insurance policy in more detail.
KeyShield Coverage: Keyman insurance helps to protect a business from financial losses that may occur as a result of the death or disability of a key employee. It provides the necessary funds to help the business recover from the loss of a key employee.
Death benefit: The primary purpose of key man insurance is to provide a cash benefit to the company in the event of the key person's death. The benefit can be used to cover expenses such as hiring and training a replacement, paying off debts, or compensating for lost profits.
Helps with recruitment and retention: Keyman insurance can be used as an incentive to attract and retain key employees. It shows that the business cares about the employee's well-being and provides an added layer of security to the employee.
Simple Safeguarding: Keyman insurance policies are relatively easy to set up and can be tailored to suit the needs of the business.
Disability Protection: Key man insurance can also provide a cash benefit in the event of the key person's disability. This can help cover the cost of medical bills, ongoing care, and lost income.
Keyman Insurance Policy Tax Benefits
Did you know that protecting your business with a keyman insurance policy not only secures the future of your company but also offers some exciting tax benefits? Let's dive deeper into the details!
- The premium paid by the business for a keyman insurance policy is tax-deductible as a business expense under Section 37(1) of the Income Tax Act, 1961. This means that the business can claim a tax deduction on the premium paid for the policy.
- Keyman is not provided with tax benefits because the firm pays its premiums. If a keyman is given control over the policy, they can choose the nominee. Therefore, in the event of the insured's passing within the term of the policy, his or her dependents would receive death benefits that, in accordance with the Income Tax Act, would be tax-free.
Why Talk to Ditto for Your Health Insurance?
At Ditto, we’ve assisted over 3,00,000 customers with choosing the right insurance policy. Why customers like Srinivas below love us:
✅No-Spam & No Salesmen
✅Rated 4.9/5 on Google Reviews by 5,000+ happy customers
✅Backed by Zerodha
✅100% Free Consultation
You can book a FREE consultation. Slots are running out, so make sure you book a call now!
Conclusion
In conclusion, a keyman insurance policy is an important protection mechanism for businesses that rely on the skills and expertise of a key employee or group of employees. This policy provides financial support to the company in case of unforeseen events such as the death or critical illness of the insured key employee(s). It covers the costs of recruiting, training, and compensating a replacement, as well as mitigating any losses incurred as a result of the key employee's absence.
The policy offers peace of mind to business owners and investors, protecting them from the risks of losing a key member of staff who have unique skills and knowledge that are critical to the success of the company. Additionally, it assists companies in keeping up their operations' continuity and preserving the trust of their customers, suppliers, and other stakeholders.
