Keyman Insurance: What Is It?

Picture this: your top sales head—the one who’s single-handedly built key client relationships—suddenly falls critically ill. Or your co-founder, the tech genius behind your product, tragically passes away. Beyond the emotional blow, there’s also the uncomfortable reality—your business is left exposed. 

Because when a key person exits unexpectedly, it’s not just a human loss—it can trigger serious financial setbacks, stalled projects, and lost revenue, which may lead to your business spiraling into a crisis.

This is where Keyman Insurance steps in.

It’s one of the most underrated risk covers in business insurance today. If you’ve ever wondered “What is Keyman Insurance Policy?” or “Do startups really need this?”—you’re in the right place.

Let’s decode this strategic tool.

If you need help choosing the right policy, feel free to chat with us on WhatsApp or book a call at a convenient time. No spam — just honest insurance advice.

What is Keyman Insurance Policy?

Keyman Insurance, also known as Keyman Policy or Key Person Insurance, is a life insurance policy purchased by a business for the life of a critical employee, typically someone whose loss would have a significant impact on the company.

However, here's the catch: unlike regular life insurance, where the family receives the claim amount, in a Keyman Insurance Policy, the company pays the premium and also receives the benefit in the event of the key person’s death. It's a smart business continuity and risk mitigation tool.

How’s it different from regular life insurance?

Who Qualifies as a Keyman or Key Person?

A key person is someone whose expertise, leadership, or relationships are critical to a company’s success. This could include founders, CXOs like the CEO or CFO, top-performing sales executives, lead scientists in R&D, or key client managers. Their sudden absence can cause revenue loss, project delays, or reputational setbacks, making it essential for businesses to protect themselves against such risks.

How Does a Keyman Insurance Policy Work?

In a Keyman Insurance Policy, the company buys the policy and pays the premium, not the individual. The key person (such as a founder, CEO, or critical employee) is the insured, but the business is the nominee/beneficiary. This means if the key person passes away during the policy term, the company receives the claim payout.

The claim process works like a typical life insurance policy—once the death is reported and the required documents are submitted, the insurer evaluates and settles the claim. The payout can be used to stabilize operations, cover revenue loss, repay loans, or fund the hiring and training of a replacement, helping the business stay afloat during a critical period.

Features of Keyman Insurance

Keyman Insurance comes with specific features that ensure it serves its core purpose—protecting the business from financial disruption due to the loss of a key individual.

1. High Sum Assured
   The policy provides substantial coverage based on the financial value of the key person. However, the maximum sum assured is capped at the lesser of:

• A multiple of the average gross profit of the company over the last three years
• A multiple of the average net profit over the last three years
• A multiple of the annual compensation of the keyman

2. Fixed Policy Term
   These policies are typically issued for a defined duration, often aligning with the key person’s expected contribution to the company or contractual tenure.
3. Policy Owned by the Company
   The business purchases the policy, pays the premium, and is also the beneficiary. This ensures the company receives the financial support it needs in case of the key person’s death.
4. Shareholding Criteria
   To qualify for Keyman Insurance, the key person should not hold more than 51% of the company’s shares. Additionally, the combined shareholding of the keyman and their family must not exceed 70% of the company’s total shareholding. This ensures the policy is used for genuine business protection and not as a personal benefit.
5. Employee’s Consent
   A company cannot take out a keyman insurance under their employee’s name unless the would-be life assured explicitly agrees to it. 
6. Non-transferable while Active as a Keyman Policy
   Once assigned to the company, the policy cannot be transferred during its term unless it's formally reassigned (e.g., on resignation or retirement), changing its nature to a regular life insurance policy. However, that depends on the tax implications and the insurer’s discretion.

These features make Keyman Insurance a well-structured and compliant tool for business continuity planning, especially when tailored to a company's unique structure and risk exposure.

Advantages of Keyman Insurance Policy

Keyman Insurance offers several strategic benefits for businesses that rely heavily on a few critical individuals. Here’s how it adds value:

1. Financial support during an unexpected loss
   In the unfortunate event of the key person’s death, the insurance payout helps the business absorb the financial shock, manage liabilities, and cover operational costs.
2. Ensures business continuity and stabilizes valuation
   The policy helps maintain stability by funding the cost of hiring a replacement and managing workflow disruptions, preserving the company’s market reputation and overall valuation.
3. Builds investor and shareholder confidence
   Having a Keyman Insurance Policy signals sound risk management to stakeholders, reassuring them of the company’s ability to survive the loss of key leadership.
4. Tax treatment of premiums and benefits
   Under Section 37(1) of the Income Tax Act, premiums paid are considered business expenses and may be tax-deductible, though death benefits may be taxable in the hands of the company.
5. Retains and protects valuable human capital
   By acknowledging the importance of key individuals, businesses also boost employee morale and loyalty, reducing the risk of losing top talent.

Whether it’s about safeguarding against revenue dips or sending the right signals to the market, the advantages of Keyman Insurance Policy make it a smart addition to any company's risk management plan.

Note: Please consult a professional tax consultant for pinpoint accuracy.

Categories of Loss Covered by Key Person Insurance

Key Person Insurance is designed to cushion a business from the financial blows that follow the sudden loss of a vital team member. Here are the common types of losses it helps cover:

1. Loss of profits due to the key person’s absence
   A key individual often plays a direct role in generating revenue. Their sudden departure can cause sales to drop, deals to stall, or projects to derail, leading to measurable profit loss.
2. Cost of hiring and training a replacement
   Recruiting someone with similar expertise can be both expensive and time-consuming. Keyman Insurance helps cover these unexpected costs until a suitable replacement is fully onboarded.
3. Business disruptions and delays
   The absence of a key person can slow down decision-making, product development, or service delivery, resulting in operational delays that affect customer satisfaction and timelines.
4. Loan repayments linked to the key person’s guarantees
   If a business loan was secured using the key person’s personal guarantee, their demise could trigger immediate repayment obligations. The insurance payout can help settle such liabilities without straining the company’s finances.

In short, Key Person Insurance acts like a financial shock absorber, mitigating multiple business risks that can arise from losing someone truly irreplaceable.

Keyman Insurance Policy Tax Treatment

Understanding the tax implications of a Keyman Insurance Policy is essential, both from a compliance standpoint and for optimizing tax benefits. Here’s how it works:

• Taxation on Premiums (Section 37 of the Income Tax Act, 1961) The premium paid by the business for a Keyman Insurance Policy is tax-deductible as a business expense under Section 37(1). This means the company can claim it while computing taxable profits, making it a smart financial move.
• Taxability of Death BenefitsIf the policy remains assigned to the company (i.e., the business is both the proposer and beneficiary), the claim amount received by the company is taxable as business income.However, if the policy is later assigned to the key person—say, on resignation or retirement—the key person becomes the policyholder and can name a nominee. In this case, any death benefits received by the nominee are tax-free under Section 10(10D), provided conditions are met.
• Implications for Both Employer and Employee
  • For the employer: Premiums are tax-deductible, but the death benefit (if received by the business) is taxable.
  • For the keyman: There is no tax benefit during the policy term, as the employer pays the premium. However, if the policy is assigned to the keyman, the surrender value or death benefit later becomes tax-exempt for their nominee under Section 10(10D), as per prevailing tax laws.

In short, Keyman Insurance is not just a strategic risk-mitigation tool—it also offers noteworthy tax advantages, particularly for businesses seeking to safeguard their financial interests without incurring the full tax burden.

Disclaimer: This is to give the readers a tentative idea about how taxation in Keyman Insurance works. Please consult a professional tax consultant for pinpoint accuracy.

Cost of Keyman Insurance

The cost of a Keyman Insurance Policy can vary widely depending on several factors related to both the key person and the policy structure. Here’s what influences the premium:

1. Age and Health of the Key Person
   Younger and healthier individuals typically attract lower premiums, while older key personnel or those with medical conditions may face higher costs.
2. Role and Importance in the Company
   A keyman's designation, responsibilities, and contribution to revenue generation play a critical role. For example, a founder or top-performing sales executive might require a higher sum assured, leading to a steeper premium.
3. Annual Salary and Business Impact
   The premium often correlates with the key person’s compensation and the financial risk their absence would pose to the business.
4. Policy Term and Sum Assured
   Longer policy durations and higher coverage amounts naturally result in higher premiums. Businesses typically choose the sum assured based on:
   1. the average gross profit over the past 3 years
   2. the average net profit over the past 3 years
   3. Or, the keyman’s annual compensation—whichever is lower

In short, the premium is tailored to reflect the value of the key person to the business and the extent of risk the company wants to mitigate.

Who Should Opt for a Keyman Policy?

Keyman Insurance isn't just for large corporations—it’s especially valuable for businesses where a few individuals drive most of the growth, revenue, or innovation.

1. Small and Medium Enterprises (SMEs)
   In many SMEs, the success of the business hinges on one or two people. Losing them unexpectedly could severely impact operations, client relationships, and profitability. Keyman Insurance acts as a financial buffer in such scenarios.
2. Startups with High-Value Talent
   Startups often rely on a small core team—usually founders or early hires—with niche expertise or strong investor relationships. Protecting these individuals with a Keyman Policy reassures investors and adds stability to long-term planning.
3. Firms Dependent on a Few Revenue-Generators
   Businesses that lean heavily on specific rainmakers—like top sales leaders, lead engineers, or client-facing executives—are vulnerable to financial shocks in their absence. A Keyman cover helps mitigate this risk and ensures smoother business continuity.

In short, if losing one person could stall or sink your business, it’s time to consider Keyman Insurance.

Best Term Insurance Plans 2025

1. HDFC LIFE Click 2 Protect Super: HDFC Life Click2Protect Super is a comprehensive term insurance plan that stands out for its high customizability and strong claim settlement track record, though it tends to be relatively expensive for many profiles. The plan boasts a Claim Settlement Ratio of 99.2% and an exceptionally low complaints ratio of just 2 per 10,000 claims, indicating reliable service. It offers useful add-ons like accidental death benefits, waiver of premium on disability or critical illness, total permanent disability cover, and even the option to increase cover in line with inflation. 
   
   A notable in-built feature is the zero-cost option, which allows you to exit the policy during a specified window and get your premiums refunded. While the critical illness benefit covers 60 illnesses and includes a shorter-than-average waiting period of 90 days, it comes with a 15-day survival clause and only pays on top of the base cover, not as an accelerated payout. The terminal illness benefit offers partial payouts, and while the plan includes the return of premium and top-up options, these are either costly or limited to life events like marriage or childbirth. Overall, it's a solid plan from a reputable insurer, but not the most budget-friendly choice out there.
2. ICICI Prudential iProtect Smart: ICICI Prudential iProtect Smart is a well-rounded term insurance plan that balances affordability and features well, especially for salaried individuals and smokers. It offers competitive premiums, a decent claim settlement ratio of 97.52%, and a solid amount settlement ratio of 92.1%, with fewer complaints than the industry average, making it a fairly reliable option. One of its standout features is the Life Stage Benefit, which lets you increase your coverage after major milestones like marriage or childbirth. It also includes useful in-built features like a Zero Cost Option, allowing you to exit the policy during a specific window and get your premiums back, and a terminal illness benefit that pays out the full cover upon diagnosis. 
   
   The plan allows for an accidental death benefit add-on and offers critical illness coverage for 34 illnesses, with immediate payouts upon diagnosis, though the benefit is paid from the base cover (accelerated payout) and has a longer-than-average 180-day waiting period. The waiver of premium is only triggered upon permanent disability due to an accident, and while there's no inflation-linked top-up or payout for total permanent disability, the plan still holds strong for those looking for decent coverage at a fair price. It’s especially appealing if you want basic protection with a few thoughtful add-ons without breaking the bank.
3. Axis Max Life Insurance Smart Term Plan Plus: The Axis Max Life Smart Term Plan Plus is a flexible term insurance plan that offers seven different coverage options, but the "Regular (Level Cover)" and "Smart Cover" variants are the real standouts. The Regular option is a simple, no-frills plan, while the Smart Cover gives you 1.5X coverage for the first 15 years—ideal if you want extra protection during your high-responsibility years. The plan comes packed with essential add-ons like accidental death benefit, critical illness cover (covering 64 illnesses), waiver of premium on disability or critical illness, and even a zero-cost exit option that refunds your premiums if you exit during a specified period. Women also get access to thoughtful perks like Lifeline Plus and Maternity Cover. That said, the plan doesn’t allow you to top-up your coverage later or link your coverage to inflation, which can be a drawback if you’re looking for long-term adaptability. Still, for most people, it’s a well-rounded and customizable option that ticks a lot of boxes.
4. Bajaj Allianz Life eTouch II: Bajaj Allianz Life eTouch II is a well-rounded term insurance plan that offers affordability, strong claims performance, and solid rider benefits. It includes a Zero Cost Option, so you can walk away with your premiums refunded if you exit at a certain point. There’s also a waiver of premium for permanent disability due to accidents and a life-stage benefit that lets you increase coverage after major milestones like marriage or childbirth. Its critical illness rider covers up to 60 conditions, pays out on top of the base sum insured, and comes with a relatively short 90-day waiting period and a 14-day survival clause—quicker than many in the market. Women and non-smokers also enjoy highly competitive pricing. Bajaj Allianz’s claim settlement (99.11%), low complaint ratio (4.4 per 10,000 claims), and amount settlement ratio (93%) are all impressive, especially when compared to industry averages. That said, there are a few misses—you don’t get the option to link your cover to inflation, and there’s no lump sum payout for total permanent disability. But overall, if you’re looking for a plan that balances price, features, and reliability, eTouch II is a pretty compelling pick.
5. TATA AIA Sampoorna Raksha Promise: The TATA AIA Sampoorna Raksha Promise is a solid pick if you're looking for a highly customizable and reasonably priced term plan. It’s especially great for people with lower annual incomes who still want substantial coverage. The plan comes with strong claim metrics—boasting a 98.9% claim settlement ratio, a low complaints ratio of just 3 per 10,000 claims, and an impressive 92.7% amount settlement ratio. It also offers useful add-ons like critical illness cover, which pays out a lump sum on top of your term cover if you’re diagnosed with any of the 40 listed illnesses. The accidental death and total permanent disability benefits add an extra layer of protection, and you also get a waiver of premium if you're ever critically ill or permanently disabled. There are a few nice built-in features, too, like the life stage benefit, which lets you increase your coverage after big life events, and a partial terminal illness payout. That said, it does fall short on a couple of fronts. There's no zero-cost option, which some other plans offer, and you can’t increase your coverage automatically with inflation. But these aren’t major deal-breakers for most people. Overall, if you're after a dependable term plan with solid features and strong claim performance, this one is definitely worth considering.

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Conclusion

Keyman Insurance is a vital risk-mitigation tool for businesses that heavily rely on a few key individuals. It helps safeguard your company’s financial health by offering protection against the loss of a critical person, ensuring business continuity during challenging times. Whether it's covering financial losses, aiding in smooth transitions, or reassuring investors, Keyman Insurance provides valuable security for businesses of all sizes.

It’s not just about protecting your business—it’s about ensuring that in the event of an unexpected loss, your operations remain stable, and your long-term vision stays on track. Consulting with a financial advisor or an insurer to explore Keyman Insurance can be a smart move to future-proof your business.

Frequently Asked Questions