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Keyman Insurance Policy
[Submitted by CA. Jayesh Satish Behede,
B.Com (Hons.), ACA
Jalgaon, Maharashtra]
November 15, 2006
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:
- Directors of a Company
- Key Sales People
- Key Project Managers
- People with Specific Skills
Advantages of keyman insurance to the company :
- In case of death of a keyman the company
gets money to cope up with the loss
- 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.
- No advance intimation/approval is
necessary from the Income Tax authorities to claim deduction of
insurance premium payment.
- 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.
- The company can also raise loans on the
policy from LIC at 12 per cent per annum.
- 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.
- For the executives earning high
salaries, this policy can be given as a hike in salary and save on the
tax outgo.
- At the same time, it also helps the
company in its tax planning.
- 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.
- Insulate the risk of financial loss
against loss of a Keyman.
- Interest on loans taken against a keyman
insurance policy may also be allowed as business expenses.
- 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.
- Keyman Insurance policy is a positive
measure to improve the retention of the keyman in the company.
Disadvantages of Keyman insurance :
- 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).
- 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.
- Company is liable to pay FBT on this
expense. This is treated as Employees Welfare & FBT is to be paid at 30%
of 20% of value of fringe benefit i.e. 6% of value of FB.
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.
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