“KEYMAN INSURANCE”
1
INTRODUCTION
Insurance is a cover used for
protecting oneself from the risk
of a financial loss. It is important
to understand that risk is a part of
any person’s life and that it
increases as a person increases in
age, responsibility and wealth.
Insurance is risk coverage against
financial losses and should not be
taken as an investment
instrument.
There are mainly two parties involved in this – the insurer and the insured. The
insurer is the insurance company who will provide the cover to the insured against
any financial losses. The insured may be an individual person or a group of people
like an employer, members of a society, etc.
A policy is the contract between the insurer and the insured, which states the risks
covered, the exclusions, if any, and the benefits reimbursed on the happening of an
event like death, illness etc. The policy is paid through what is called a premium,
which is a set amount that must be paid by the insured on a monthly, semi-annual
or annual basis. On the happening of an event like death, disability, fire, etc, for
which the insured is covered, the benefit amount stated in the policy contract can
be claimed by the insured.
“KEYMAN INSURANCE”
2
CLASSIFICATION OF INSURANCE
There are mainly two broad classes of Insurance – Life and Non Life.
Life insurance products include Term Life policies, which give a pure risk
coverage of only the death benefit, whereas endowment or money back
policies have a risk as well as savings component i.e. death as well as
maturity benefit. Also coming under the life insurance umbrella are the
Unit – Linked Policies in which there is a risk component and a savings
component, which is invested in equity, debt or gilt funds, depending on the
insurance company.
Non Life insurance products include property or casualty, health insurance
or house, fire, marine insurance etc. This insurance class deals with all the
nonlife aspects of an insured like his/her house, health, land, office, cargo,
etc which might bring financial loss.
LIFE INSURANCE
Life insurance is an agreement between
you (the insured) and an insurer. Under
the terms of a life insurance policy, the
insurer promises to pay a certain sum to a
person you choose (your beneficiary)
upon your death, in exchange for your
premium payments. Proper life insurance
coverage should provide you with peace
of mind, since you know that those you
care about will be financially protected after you die.
“KEYMAN INSURANCE”
3
Origin of Life Insurance
Life Insurance in its modern form came to India from England in the year 1818.
Oriental Life Insurance Company started by Europeans in Calcutta was the first
life insurance company on Indian Soil. All the insurance companies established
during that period were brought up with the purpose of looking after the needs of
European community and these companies were not insuring Indian natives.
However, later with the efforts of eminent people like Babu Muttylal Seal, the
foreign life insurance companies started insuring Indian lives. But Indian lives
were being treated as sub-standard lives and heavy extra premiums were being
charged on them. Bombay Mutual Life Assurance Society heralded the birth of
first Indian life insurance company in the year 1870, and covered Indian lives at
normal rates. Starting as Indian enterprise with highly patriotic motives, insurance
companies came into existence to carry the message of insurance and social
security through insurance to various sectors of society. Bharat Insurance
Company (1896) was also one of such companies inspired by nationalism.. The
United India in Madras, National Indian and National Insurance in Calcutta and
the Co-operative Assurance at Lahore were established in 1906.
The Life Insurance Companies Act 1912 made it necessary that the premium rate
tables and periodical valuations of companies should be certified by an actuary.
But the Act discriminated between foreign and Indian companies on many
accounts, putting the Indian companies at a disadvantage.
“KEYMAN INSURANCE”
4
OBJECTIVE OF LIFE INSURANCE
The main Objectives of Life Insurance is as follows:
To spread Life Insurance widely and in particular to the rural areas and to
the socially and economically backward classes with a view to reaching all
insurable persons in the country and providing them adequate financial
cover against death at a reasonable cost.
Maximize mobilization of people's savings by making insurance-linked
savings adequately attractive.
Bear in mind, in the investment of funds, the primary obligation to its
policyholders, whose money it holds in trust, without losing sight of the
interest of the community as a whole; the funds to be deployed to the best
advantage of the investors as well as the community as a whole, keeping in
view national priorities and obligations of attractive return.
Conduct business with utmost economy and with the full realization that
the moneys belong to the policyholders.
Act as trustees of the insured public in their individual and collective
capacities.
Meet the various life insurance needs of the community that would arise in
the changing social and economic environment.
Involve all people working in the Corporation to the best of their capability
in furthering the interests of the insured public by providing efficient
service with courtesy.
Promote amongst all agents and employees of the Corporation a sense of
participation, pride and job satisfaction through discharge of their duties
with dedication towards achievement of Corporate Objective.
“KEYMAN INSURANCE”
5
Important Milestones in the Indian Life Insurance Business
1818: Oriental Life Insurance Company, the first life insurance company on
Indian soil started functioning.
1870: Bombay Mutual Life Assurance Society, the first Indian life
insurance company started its business.
1912: The Indian Life Assurance Companies Act enacted as the first statute
to regulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to enable the
government to collect statistical information about both life and non-life
insurance businesses.
1938: Earlier legislation consolidated and amended to by the Insurance Act
with the objective of protecting the interests of the insuring public.
1956: 245 Indian and foreign insurers and provident societies are taken
over by the central government and nationalized. LIC formed by an Act of
Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore
from the Government of India.
“KEYMAN INSURANCE”
6
The Insurance Regulatory and Development Authority (IRDA)
The Insurance Act, 1938 had provided for setting up of the Controller of Insurance
to act as a strong and powerful supervisory and regulatory authority for insurance.
Post nationalization, the role of Controller of Insurance diminished considerably in
significance since the Government owned the insurance companies.
But the scenario changed with the private and foreign companies foraying in to the
insurance sector. This necessitated the need for a strong, independent and
autonomous Insurance Regulatory Authority was felt. As the enacting of
legislation would have taken time, the then Government constituted through a
Government resolution an Interim Insurance Regulatory Authority pending the
enactment of a comprehensive legislation.
The Insurance Regulatory and Development Authority Act, 1999 is an act to
provide for the establishment of an Authority to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of the insurance
industry and for matters connected therewith or incidental thereto and further to
amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the
General insurance Business (Nationalization) Act, 1972 to end the monopoly of
the Life Insurance Corporation of India (for life insurance business) and General
Insurance Corporation and its subsidiaries (for general insurance business).
The act extends to the whole of India and will come into force on such date as the
Central Government may, by notification in the Official Gazette specify. Different
dates may be appointed for different provisions of this Act.
Words and expressions used and not defined in this Act but defined in the
Insurance Act, 1938 or the Life Insurance Corporation Act, 1956 or the General
Insurance Business (Nationalization) Act, 1972 shall have the meanings
respectively assigned to them in those Acts.
“KEYMAN INSURANCE”
7
FUNDAMENTAL PRINCIPLES OF LIFE INSURANCE
A contract is defined as an agreement between
two or more parties to do or to abstain from
doing an act with an intention to create a
legally binding relationship. The Basic
Principles of Life Insurance are as follows:
1. Law of Large Numbers
Insurance and more particularly Life Insurance relies on the law of large numbers
to minimize the losses and to make it viable. The law of large numbers, show that
in insurance the greater number of similar exposures to a peril, the less observed
loss experienced will deviate from the expected loss experience. The law of large
numbers does not suggest that the losses to particular individual will become more
predictable. Rather it suggest that the longer the group (of people) insured, the
more predictable will be the loss experience of the entire group, other things being
similar.
2. Principle of Utmost Good Faith
Since insurance shifts risk from one party to another, it is essential that there must
be utmost good faith and mutual confidence between the insured and the insurer.
In a contract of insurance the insured knows more about the subject matter of the
contract than the insurer. Consequently, he is duty bound to disclose accurately all
material facts and nothing should be withheld or concealed. Any fact is material,
which goes to the root of the contract of insurance and has a bearing on the risk
involved. It is only when the insurer knows the whole truth that he is in a position
to judge whether he should accept the risk and what premium he should charge.
If that were so, the insured might be tempted to bring about the event insured
against in order to get money.
“KEYMAN INSURANCE”
8
3. Principle of Insurable Interest
A contract of insurance affected without insurable interest is void. It means that
the insured must have an actual pecuniary interest and not a mere anxiety or
sentimental interest in the subject matter of the insurance. The insured must be so
situated with regard to the thing insured that he would have benefit by its existence
and loss from its destruction. The owner of a ship run a risk of losing his ship, the
charterer of the ship runs a risk of losing his freight and the owner of the cargo
incurs the risk of losing his goods and profit. So, all these persons have something
at stake and all of them have insurable interest. It is the existence of insurable
interest in a contract of insurance, which distinguishes it from a mere watering
agreement.
“KEYMAN INSURANCE”
9
TYPES OF LIFE INSURANCE
Taking out a life insurance policy covers the risk of dying early, by providing for
your family in the event of your death. It also manages the risk of retirement -
providing an income for you in non-earning years. Choosing the right policy type
with the coverage that is right for you therefore becomes critical. There are a
variety of policies available in the market, ranging from Term Endowment and
Whole Life Insurance, to Money Back Policies, ULIPs, and Pension plans. Let’s
see what each of these is about, so that you can consider the one that best
suits.
TERM INSURANCE
ENDOWMENT INSURANCE
WHOLE LIFE INSURANCE
MONEY BACK PLAN
ULIP
PENSION PLAN
T
Y
P
E
S
E
“KEYMAN INSURANCE”
10
1. Term Insurance
Term Insurance, as the name implies, is for
a specific period, and has the lowest
possible premium among all insurance
plans. You can select the length of the term
for which you would like coverage, up to
35 years. Payments are fixed and do not
increase during your term period. In case of
an untimely death, your dependents will
receive the benefit amount specified in the term life insurance agreement.
You can customize Term life insurance with the addition of riders, such as Child,
Waiver of Premium, or Accidental Death.
2. Endowment Insurance
Endowment Insurance is ideal if you have a short career path, and hope to enjoy
the benefits of the plan (the original sum and the accumulated bonus) in your life
time. Endowment plans are especially useful when you retire; by buying an
annuity policy with the sum received, it generates a monthly pension for the rest of
your life.
“KEYMAN INSURANCE”
11
3. Whole Life Insurance
Whole Life Policies have no fixed end date
for the policy; only the death benefit exists
and is paid to the named beneficiary. The
policy holder is not entitled to any money
during his or her own lifetime, i.e., there is no
survival benefit. This plan is ideal in the case
of leaving behind an estate. Primary
advantages of Whole Life Insurance are
guaranteed death benefits, guaranteed cash values, and fixed and known annual
premiums.
4. Money-Back Plan
In a Money-Back plan, you regularly receive a percentage of the sum assured
during the lifetime of the policy. Money-Back plans are ideal for those who are
looking for a product that provides both - insurance cover and savings. It creates a
long-term savings opportunity with a reasonable rate of return, especially since the
payout is considered exempt from tax except under specified situations.
“KEYMAN INSURANCE”
12
5. ULIP
Unit-linked Insurance Plans (ULIPs),
introduced by the private players, are
hugely popular, because they combine the
benefits of life insurance policies with
mutual funds. A certain part of the premium
is invested in listed equities/debt
funds/bonds, and the balance is used to
provide for life insurance and fund
management expenses.
6. Pension Plan
Insurance companies offer two kinds of
pension plans - endowment and unit
linked. Endowment plans invest in
fixed income products, so the rates of
return are very low. Unit-linked plans
are more flexible. You can stop
contributing after 10 years and the fund
will keep compounding your corpus till
the vesting date. You can opt for
higher exposure in the stock market for your plan if your risk appetite allows it.
Lower risk options like balanced funds are also offered.
“KEYMAN INSURANCE”
13
INTRODUCTION
We insure our factories, machinery,
company vehicles etc. to mitigate the
risk of loss to business in case of
loss/damage to them. However, we
often forget to insure some of our key
human resources. "Life insurance isn't
meant for people who die. Life
insurance is meant for people who
live." The basic tenet of life insurance is to indemnify the survivors against
financial loss. 'Keyman' is one such type of insurance.
Loss of these key human resources can sometimes prove to be potentially more
damaging than the loss of machinery or goods. Employees are valuable assets and
the loss of some key employees could significantly impact the profitability,
stability and progress of the company. Keyman Insurance provides you with the
unique opportunity to protect your business against the unfortunate loss of key
people, while giving you valuable tax advantage and a lovely tool to help
employee loyalty too.
Various types of life insurance policies are available in the market today. Both
endowment policy and term policy can be bought under keyman insurance. Some
companies even offer ULIPs under keyman insurance.
Keyman insurance can be defined as "insurance of someone with specialist skills
or knowledge or particularly important areas of responsibility whose loss to a
business would adversely affect its profitability". It is 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.
“KEYMAN INSURANCE”
14
The 'keyman' here would be any person employed by a company with specialized
skills, or substantial responsibilities and who contributes significantly to the
profits of that organization and whose loss can cause a financial strain to the
company are eligible for Keyman Insurance. Keyman Insurance is also called Key
Person Insurance, or Key Executive Insurance.
For example, they could be:
Directors of a Company
Key Sales Person
Key Project Managers
People with Specific Skills etc.
As these names imply, this is generally an insurance policy, which is designed to
protect a business in the event of the death or extended incapacity of an executive
or key member of business specified on the policy. By obtaining a Keyman
Insurance, a business ensures compensation for financial losses that would arise
from the death of the valued member of the business, and also facilitates business
continuity.
For the purposes of the Income Tax Law, a “keyman” may be defined as that
person in an Organization, whose expertise, knowledge and services are
indispensable to the performance and growth of that Organization. Simply put, the
effective functioning of the Organization depends largely, or exclusively, on this
particular individual.
This is determined through the fact that without the services and expertise of this
individual, an Organization’s ability to effectively carry through its income or
profit functions/intake, would be either below normal or viable standards, or
reduced to an unprofitable state.
“KEYMAN INSURANCE”
15
Any Organization which relies this heavily on the skill and ability of its employees
may recognize the need to buy Life Insurance on behalf of this employee - so that
in the event of this employee’s death there would be an additional income
forthcoming to mitigate against the possible loss of profits, which may occur.
The conditions listed below are the premises under which the Organization can
claim the insurance premiums paid
1. The premiums must be paid on the life of an employee.
2. The proceeds of the Policy at death, or maturity, will be brought into the
Account of the business as a Revenue Receipt.
3. Generally, the insurance is to meet loss of profit due to loss of the services
of the employee.
4. The premiums must be for a limited number of years (not exceeding 10
years).
5. The sole relationship between the Insurer and the Insured must be that of
employer and employee.
6. Whole life or straight life policies will not be accepted for loss of profit
insurance except in certain special circumstances and will be dependent on :
(a) The age of the employee at the date the insurance is effected.
(b) The expectancy of life of the employee having regard to his family
history.
“KEYMAN INSURANCE”
16
Origin of Keyman Insurance
Keyman insurance policy was introduced in the
early 1970s by the Swiss Re Insurance Co and the
LIC of India. It has gained prominence only now
due to the aggressive competitive business
environment in the post-liberalization India. The
trend has been prompted due to the high attrition
rates and corporate-leaping among the personnel
with intellectual capital. Thus, loss of a key
employee or managing director whose absence may
have a drastic effect on the profit graph of the company is an exposure for which
modern organizations perforce have to envisage and take appropriate coverage.
Increasingly the keyman insurance has acquired the character of loan protection
insurance as it is being taken mainly at the direction of the banks and finance
institutions to ensure the recovery of the loan or liquidation of the overdraft in case
of death or exit of the key person from the organization.
Keyman insurance is essentially a life insurance policy taken by a company on the
life of a key person who is pivotal to the viability of its business. The beneficiary
is the employer. The term of the policy will be co-terminus with the period of the
employee’s utility to the company. The idea of the keyman insurance is to
indemnify the organization for the losses that may accrue due to the sudden exit or
death of the key person so as to enable the continuation of the business.
Keyman insurance policies have been resorted to not only for covering more than
one key person in an organization but also for covering all those persons who are
critical for the organization though they may not necessarily be ranked as the key
persons in the corporate hierarchy. Hence, a “key person” can be anyone from a
director to an ordinary employee with special expertise, for instance, a highly-
innovative research scientist.
“KEYMAN INSURANCE”
17
OBJECTIVE
The object of key man Insurance is to protect the company from the adverse
financial effect by the Key Employee or Key Director’s death by making funds
available to the company in his absence. The company’s progress and profit,
usually depends upon the vital decision or technical expertise skill, knowledge,
entrepreneurial vision of its Key Director or Key Employee, particularly in this
competitive Globalised marketing Environment.
Today’s company’s expansion diversification, and setting up policy depends upon
its Far sighted Vision, decision, technical know-how of the Key Director and Key
Employee and that’s required to be secured by purchasing Key-man Insurance for
making funds available for promoting, recruiting in the absence of Key-man
includes key-woman. This policy is specially purchased by the company (both Pvt.
and Pub Ltd. Co.) for the life of its single most important Key person.
Purpose of Keyman Cover
It provides a financial cushion to the company for:
The loss of customers or sales affected by the keyman’s ability and
personality.
The loss of day-to-day specialized skills.
The cost of recruiting and training a suitable replacement.
Delay or cancellation of any business project that the keyman is working in.
The loss of opportunity to expand in the future.
The loss of stable management and good labor relations.
Reduction of credit worthiness - recall of loans guaranteed by the keyman.
“KEYMAN INSURANCE”
18
Uses for Key Man Insurance
1. Providing funds for recruiting and training a replacement key employee.
2. Paying any expenses or bills while the company stabilizes.
3. Securing loans for business growth and expansion.
4. Strengthening the company’s credit position.
5. Purchasing stock from the deceased owner’s estate.
6. Offering salary continuation arrangements to the spouse of the deceased.
7. Funding executive compensation plans.
8. Transitioning company ownership to its successors.
TYPES OF KEYMAN INSURANCE
As indicated in the introduction, Keyman insurance falls under the main insurance
umbrella of Business Protection. And there are 3 main types of policies which are
discussed in more detail via the links below -
1. Profit protection:
It pays out a cash sum to help shore up profits. The money can also be used
for training and recruitment purposes.
2. Corporate loan and overdraft protection:
It pays out a cash sum for the specific purpose of repaying company debt.
Very useful if the directors have personal guarantees or second mortgages in
place.
3. Ownership Protection:
Pays out a cash sum to be used to buy out the deceased (or critically ill)
director's or partner's shareholding.
“KEYMAN INSURANCE”
19
FACTORS THAT MAKE A KEYMAN
Skill and Knowledge:
In many business firms there is one whose technical knowledge, experience, or
particular skill makes him the most valuable asset of the firm and makes him
almost indispensable to the successful operation of the business. In each case, the
keyman possesses skill and knowledge related to the firm’s affairs which could be
acquired by successor only after considerable time.
FACTORS
SKILL & KNOWLEDGE
SOURCES OF FIRM CREDIT
SOURCES OF BUSINESS
“KEYMAN INSURANCE”
20
Sources of Business:
Often the keyman of a firm is valuable sources of
business. He has close personal contacts with
substantial buyers of the goods or services
produced by the firm. Business which comes to a
firm because of personal ties with a keyman can
very quickly go elsewhere in the keyman’s death.
Sources of firm Credit:
In many businesses, someone is the chief sources and the strength of the firm’s
credit. A keyman is indirectly an important source of credit from banks or others
because of its integrity, the size of his personal fortune, or his managerial ability.
“KEYMAN INSURANCE”
21
ADVANTAGES OF KEYMAN INSURANCE TO THE FIRM
Claim: In case of death of a keyman the firm gets money to cope up with
the loss.
Peace of mind. Business owners, investors, and creditors can all rest
assured that the business is protected.
Affordability. Key man life and key man disability insurance are both very
affordable. Additionally, inexpensive term insurance can be used to fund
key person life insurance.
Choice. Companies can decide for themselves which employees need to be
insured.
Accessibility. Key employee insurance policies are easy to acquire and do
not require any special filings or IRS disclosures.
No tax. In most cases, funds from keyman life and disability policies are
received by the company tax free.
Compensation funds. Universal life insurance can be used by the business
to fund compensation plans for key executives. Such long-term policies
build equity that is accessible for use when needed by the company.
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.
The company can also raise loans on the policy from LIC at 12 per cent per
annum.
“KEYMAN INSURANCE”
22
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.
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.
“KEYMAN INSURANCE”
23
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.
As is evident, the demerits of keyman insurance are more tax-oriented than
insurance-oriented which means that buying keyman insurance is still beneficial
from the company’s point of view.
This is primarily because of the significant role that a keyman plays in keeping a
company rolling. It pays to insure the keyman to protect the company from any
contingencies to the keyman. Also, 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
has 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.
“KEYMAN INSURANCE”
24
INTRODUCTION
One of the most significant uses of life insurance in a business is "key man
insurance". With key man insurance, your business financially secures itself
against the potential early loss of someone who is so vital to the company's profits
or continuance that without them it's a very realistic possibility that your company
will suffer severe financial losses or have to fold entirely.
Key man insurance is most often used by smaller businesses, but big businesses
also use it. Key person insurance actually meets the needs of a large variety of
companies, but it is most crucial for small and medium size businesses. This is
because the success of this size company hinges solely on the skills and
experience of a select handful of individuals. Should one of these key employees
or executives experience death or disability, the company may very well meet its'
demise. Other businesses that need key man insurance are start-up companies,
companies that need to secure financing, companies in niche markets where
employee replacements are not readily available, companies with one exceptional
sales person, and companies in which the owner requests liquidity in the event of
their death or disability. These offer more details on these types of business.
A Keyman Insurance can be described as an insurance policy taken out by a
business to compensate that business for financial losses that would arise from the
death or extended incapacity of the member of the business specified on the
policy.
Every insurance company has different procedures to offer the keyman insurance
schemes and also they also have their own steps to settle the claim amount
accordingly. While applying for Keyman insurance the applicant company has to
ready with all the legal documents and other requirements.
“KEYMAN INSURANCE”
25
KEY MAN INSURANCE BENEFITS
A Key Man insurance policy provides a cash lump sum or a one off large payment
that is made available in the event of a long term illness or the death of a
designated “key person”. The idea of the cash lump sum is to provide financial
protection to the business due to the loss of the key person for a long period of
time.
The cash helps to stabilize the business financially. There are generally three
categories of loss for which Key Man Insurance can provide compensation:
1. Protect losses related to long period when a key person is unable to work; to
provide temporary staff; and, if necessary to finance the recruitment and
training of a replacement of the lost individual.
2. Protect anyone involved in guaranteeing business loans or banking facilities.
The value of insurance cover is arranged to equal the value of the guarantee
given by the key person to the banks or lending companies.
3. Protect profits such as losses resulting from the delay or cancellation of any
business project that the key person was involved in; or loss of opportunity to
follow expansion plans, loss of specialized/technical skills or knowledge.
The categories that the insurance covers are:
To Protect Profit
The loss of a key person can often have a negative effect on the profitability of a
company. Sales may be lost as this person had the key relations with the clients, or
sales may fall dramatically as this person was the new business development
person. This policy can be used to cover the loss of anticipated profits from the
prolonged absence of the key person.
“KEYMAN INSURANCE”
26
To Stabilise Business Recovery
The insurance pays out to ensure the business is able to continue trading as normal
and recover from the long term absence of a key person. This can sometimes
involve a replacement for the key person or the training of an existing member
staff to fulfill the role of the insured person.
To Protect Guarantees
The policy can also be used to cover anyone involved with guaranteeing business
loans or banking facilities. To Safeguard Partnership / Shareholder Protection -
The insurance can be used to protect the interests of the shareholders or
partnership.
The S.A. under Keyman Insurance can be decided by using the
following methods:
The max S.A. for Keyman Insurance is restricted to: The maximum
Sum Assured is 10 times of the keyman’s compensation package (total
salary + annual bonuses of a regular nature and paid a fixed percentage of
salary + various other perquisites such as furnished houses, utility bills, car
and commission out of net profit) The notional value of perquisites is taken
as 30% of the gross annual salary.
Method of Gross Profit: It is calculated as 3 times of the average gross
profit (profit before depreciation) of three years.
Method of Net Profit: It is 5 times the average net profit (profit after
allowing depreciation & taxation) of last 3 years. On the basis of above
mentioned methods we can decide the max. Sum assured (S.A.) for key
man insurance.
“KEYMAN INSURANCE”
27
ELIGIBILITY FOR KEYMAN INSURANCE
The ‘keyman insurance (KMI) is allowed to the employee, if he satisfies the
following condition;
The ‘keyman’ should hold less then 51% shares of company.
The total number of shares of the company held by the keyman and his
family should be less then 70%
The keyman should be literate.
FACTORS TO BE CONSIDERED FOR INSURANCE COVER
ON KEYMAN’S LIFE.
Key-man’s qualification.
Experience in different fields.
Previous record and service period in the organization.
Is he the only key-man in the specific field or otherwise?
KEY POINTS COVERED UNDER KEYMAN INSURANCE:
Proposer: The proposer of the Keyman Insurance will be the company.
Term: 10-15 years on the basis of retirement age or service contract.
Benefits: Accident benefit and nomination are not allowed.
Assignment: Assignment is allowed only in case of absolute assignment
in favor of the key-man if he leaves the job of the company.
Entry Age: Max. age at entry – 65 years
Maturity Age: 75 years
“KEYMAN INSURANCE”
28
REQUIREMENTS FOR KEY MAN INSURANCE:
Proposal form signed by the authorized person of the company with the
stamp of his designation below his signature.
Medical certificate regarding health;
Board resolution from the authorized official of the company/ employer
identifying a person as keyman and the employer would pay the
premiums:
Audited director’s report or profit and loss balance sheet with schedules
for the last three years;
Proof of shareholding pattern of the company on company letter head;
consent by the authorized signatory of the company for endorsement on
keyman insurance policy;
Copies of memorandum and articles of association;
Copies of partnership deed;
Certificate of incorporation;
Certificate for commencement of business.
Partnership are also eligible for keyman insurance and partners can be
insured individual or jointly.
“KEYMAN INSURANCE”
29
CLASSIFICATION OF KEYMAN INSURANCE
1. Key Man Life Insurance
Contemplating the death of company leaders is pretty dismal subject matter. But
think of the consequences - businesses have ‘gone under’ due to the death of just
one employee. Key Man life insurance is an affordable way to keep your business
solvent after a critical employee passes away.
Key Man life insurance works like individual life insurance - when the insured
dies the policy pays out a benefit. Instead of an individual insuring himself or a
family member, however, the business owns the policy and pays the premium. If
the insured dies, the business is the beneficiary and will receive the policy payout.
The founder or owner of a business shouldn't immediately be considered the right
or only candidate for a key man life insurance policy. Rank is less important than
who the critical employees in your business are. Your business couldn't function
day to day without the founder, but it also may not be able to survive without your
revenue-generating sales team or without the precious relationships a business
development employee has with your vendors.
“KEYMAN INSURANCE”
30
2. Key Man Disability Insurance
Key Man disability policies are not
readily available with traditional
disability income insurance
providers so unlike individual
disability income polices, they have
limited policy features and options.
In most cases, these policies are
custom designed, within contractual guidelines, to meet specific company needs.
These policies are very short term in nature as it is assumed that a capable
replacement can be found within 12-24 months. In the event of a claim, there are
two benefit payment options: a monthly benefit and an annual lump sum benefit.
Monthly Benefit Payout
The monthly payout option states that after the initial, elimination period of 30-90
days, benefits are payable at a monthly stated amount for the life of the key man
disability policy which is usually 6-24 months depending on the company’s need.
Lump Sum Benefits Payout
The lump sum benefit payout option requires a longer elimination period, usually
365 days before disability income benefits are paid. At that time, if the key
employee cannot perform the regular and substantial duties of his regular
occupation, the lump sum benefit is paid to the company and the policy
terminates.
The monthly benefit or lump sum benefit amount is determined by a number of
factors including the income of the key executive, the replacement costs associated
with hiring and training a capable replacement and the key person’s contribution
to the company’s earnings. Financial documentation to support the need for Key
Man disability insurance will be required for every case.
“KEYMAN INSURANCE”
31
APPLYING PROCEDURE FOR KEY MAN LIFE OR
DISABILITY INSURANCE
Independent insurance agents are here to ensure that you secure the best value on
the optimum policy for your company. Each stage in the process of applying for
key person life or disability insurance is described below for your review.
Interview
Application
Exam
Underwriting
Approval
Policy Issue
Payment and Document Remittance
“KEYMAN INSURANCE”
32
Step 1. Interview:
After determining the insurance company that offers the best policy to suit your
company, you will need to answer a few questions during a brief telephone
interview. Responses during this interview allow the insurance company to fill in
most of the formal insurance application. Your total time requirement: 10-15
minutes.
Step 2. Application:
Your insurance agent will then mail, email, or fax the key person insurance
application for you to review and sign. Be certain to read through the application
for complete accuracy, then sign where indicated and return to the insurance
company. To bind coverage, if so desired, you need to enclose a check made
payable to the insurance company for the first premium payment. Until remittance
of the first premium payment, coverage will not be in effect. Your total time
requirement: 10-15 minutes.
Step 3. Exam:
It is standard procedure for insurance companies to complete a condensed version
of a physical exam prior to approving a key man policy. After contacting you to
schedule an appointment at your convenience, a licensed examiner will complete
the exam at your office or home. During this exam, your height, weight, and blood
pressure will be recorded. You will also provide blood and urine samples, as well
as a detailed account of your medical history. Some insurance companies also
request an EKG. Your total time requirement: 20-30 minutes.
“KEYMAN INSURANCE”
33
Step 4. Underwriting:
Once the insurance company receives both the key person life application and
exam paperwork, the underwriting process begins. During the estimated four to
five weeks of this stage of approval, the insurance company will have a
representative review your application and examination report, request your lab
results from the lab, and request medical records from your physicians. Financial
information on the business and your driving record may also be requested. A
brief telephone interview is typically a part of this process, so as to verify the
accuracy of your information. Be assured that the underwriting process will be
conducted in as efficient a manner as possible in order to expedite your
application. Your total time requirement: 20 minutes.
Step 5. Approval:
You will be notified as soon as your key person policy has been approved. Please
be aware that some policies are approved at a slightly higher rate after receipt and
review of information during the underwriting process. Your policy may be
approved other than applied, in which case the insurance company with which you
applied will check the market to verify the accuracy of such offer. If a more
favorable opportunity arises that could help your business secure a more
competitive policy, you may be placed with that insurance company. At no time
will you will be under obligation to accept a policy that is not competitive within
the current market.
Step 6. Policy Issue:
Upon approval of your key person life or disability insurance policy, your
insurance company will receive the policy within seven to ten days. It will then be
forwarded to you on the day of receipt. The policy requirements will be included
in the information that is sent with your policy.
“KEYMAN INSURANCE”
34
Step 7. Payment and Document Remittance:
Take time to carefully review all documents received with your policy, contacting
your agent with any questions. Take note of all instructions and requirements that
are necessary to begin your coverage. Remit the initial premium due and all
completed and signed forms required. Your key person insurance policy is now
effective! Your total time requirement: 10 minutes.
Your total time requirement for the complete process of applying for key person
life or disability insurance: no more than 90 minutes.
“KEYMAN INSURANCE”
35
CLAIM SETTLEMENT:
In general, Key Man Insurance can be described as an insurance policy taken out
by a business to compensate that business for financial losses that would arise
from the death or extended incapacity of the member of the business specified on
the policy. The policy’s term does not extend beyond the period of the key
person’s usefulness to the business. The aim is to compensate the business for
losses and facilitate business continuity. Key Man Insurance does not indemnify
the actual losses incurred but compensates with a fixed monetary sum as specified
on the insurance policy.
There are four categories of loss for which Key Man Insurance can provide
compensation:
1. Losses related to the extended period when a key person is unable to work,
to provide temporary personnel and, if necessary to finance the recruitment
and training of a replacement.
2. Insurance to protect profits. For example, offsetting lost income from lost
sales, losses resulting from the delay or cancellation of any business project
that the key person was involved in, loss of opportunity to expand, loss of
specialized skills or knowledge.
3. Insurance to protect shareholders or partnership interests. Typically this is
insurance to enable shareholdings or partnership interests to be purchased
by existing shareholders or partners.
4. Insurance for anyone involved in guaranteeing businesses loans or banking
facilities. The value of insurance cover is arranged to equal the value of the
guarantee given by the key person.
“KEYMAN INSURANCE”
36
A Key Man can be anyone directly associated with the business whose loss can
cause financial strain to the business. For example, they could be: a Director of a
company, a Partner, key sales people, key project managers and people with
specific skills or knowledge which are especially valuable to the company.
“KEYMAN INSURANCE”
37
Introduction to LIC
On 19th of January, 1956, life insurance in India was nationalized. About 154
Indian insurance companies, 16 non-Indian companies and 75 provident were
operating in India at the time of nationalization. Nationalization of accomplished
in two stages initially the management of the companies was taken over by means
of Ordinance, and later, the ownership too by means of a comprehensive bill. The
parliament of India passed the Life Insurance Corporation Act on the 19th of June
1956, and the Life Insurance Corporation of India was created on 1st September,
1956 with the objective of spreading life insurance much more widely and in
particular to the rural areas with a view to reach all insurable persons in the
country providing them adequate financial cover at a reasonable cost.
LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from
its corporate office in the year 1956. Since life insurance contracts are long term
contracts and during the currency of the policy it requires a variety of services
need was felt in the later years to expand the operations and place a branch office
at each district headquarter. Reorganization of LIC took place and large numbers
of new branch offices were opened. As a result of re-organization servicing
functions were transferred to the branches, and branches were made accounting
units. It worked wonders with the performance of the corporation. It may see that
from about 200.00cores new business in 1957 the corporation crossed 1000.00
crores only in the year 1968-70, and it took another 10 years for LIC to cross
2000.00 crore mark of new business. But with reorganization happening in the
early eighties, by 1985-86 LIC had already crossed 7000.00 crores Sum Assured
on new policies.
“KEYMAN INSURANCE”
38
POLICES AVAILABLE UNDER KEYMAN INSURANCE IN
LIC
LIC’s Anmol Jeevan I
Suitability
Key Man is the life Insurance, taken by a Company, on the life of an Employee
Director whose services have significant effect on the profitability of the company
and whose premature death will adversely affect its profitability, stability and
progress. There can be even more than one Key man in a company.
Objective
The object of key man Insurance is to protect the company from the adverse
financial effect by the Key Employee or Key Director’s death by making funds
available to the company in his absence. The company’s progress and profit,
usually depends upon the vital decision or technical expertise skill, knowledge,
entrepreneurial vision of its Key Director or Key Employee, particularly in this
competitive Globalised marketing Environment.
Today’s company’s expansion diversification, and setting up policy depends upon
its Far sighted Vision, decision, technical know-how of the Key Director and Key
Employee and that’s required to be secured by purchasing Key-man Insurance for
making funds available for promoting, recruiting in the absence of Key-man
includes key-woman. This policy is specially purchased by the company (both Pvt.
and Pub Ltd. Co.) for the life of its single most important Key person.
“KEYMAN INSURANCE”
39
Benefits
Substantial Income Tax Savings: The premium paid by the company for an
insurance policy taken on the life of Key-man is a permissible BUSINESS
EXPENDITURE U/S 37 (1) of I.T. Act,1961.( Refer CBDT letter No. 35/12/64-11
Dt.03.02.1964 addressed to L.I.C.& Finance bill 1996. Hence sizeable premium
paid will be covered by significant savings in income tax and thereby reduce the
Tax Liability.
Independent Sinking Fund
The company is able to create an asset for itself in the form of premiums paid and
added bonus.
Protection against Financial Losses
The company suffers a heavy financial losses in case of premature death of its Key
Man whose decision, technical knowledge, experience have significant
contribution in company’s progress, profit and success. A person can not be
replaced but making the provision of an independent sinking fund, the company
can promote the second line managerial leadership (giving time to get trained and
experienced) or purchase the services. This will Protect the interest of the other
Employees, Creditors, Salesman, Financial Institutes, Shareholders, Clients etc.
and keep the company’s position stabilized in the competitive market.
Loan Facility
The company can raise loan on KMI policy from L.I.C. at 12% rate of interest p.a.
with simple and quick procedure. Even though the policy is not assigned the banks
do accept the documents as collateral security. In fact, some of the Banks and
Financial Institutes insist for this policy. KMI policy can be accepted as security
under Housing loan by L.I.C. for making provision of Housing facility by the
company for its Employee/Directors.
“KEYMAN INSURANCE”
40
Claim Amount
Since the insurance is taken for the benefits of the business and is Allowed as
business Expenses, the premium paid is not treated as perks in the hands of the
K.M. (Refer CBDT letter Dt. 03.02.1964, addressed to L.I.C.) The maturity
proceeds is taxable as a part of total income. So the corporate assesses can
postpone tax liability for a substantial period. It works out especially well for
corporate with taxable profits & expansion plans in the pipelines. If the expansion
or diversification takes place in or before maturity of the policy, the additional
depreciation admissible would absorb the absolute sum received on maturity in
later years. The death proceeds will not be taxable.
Beneficiary of KMI
The Company is the beneficiary and the maturity amount will pass on to the
Company. However, observing the procedure through assignment or agreement
Surrender value of the policy can be transferred to the Key-Man only, without Tax
liability to KM.
The Maturity proceeds is taxable as a part of total income. So the
corporate assets can postpone tax liability by a substantial period. It
works out especially well for corporate with taxable profits & expansion
plans in the pipeline. If the expansion or diversification takes place in or
before maturity of the policy the added depreciation admissible would
absorb the absolute sum real on maturity in later terms.
The stock Exchange reactions are in a vogue valuation of management
but Value it yourself earlier.
“KEYMAN INSURANCE”
41
Maximum Allowable Sum Assured under KMI
This depends upon the nature, size and business of the Company and the
importance of key person in execution of job/business with the help of his
qualification/experience to make the company, profitable. Maximum allowable
S.A. will be lower of the following:
5 times of average net profit after making provisions for depreciation and
Income Tax.
Two to three times of the G.P. (Net profit + Depreciation + Income Tax).
Salient Features
The policy being a pure term plan, the sum assured is payable on the
death of the policyholder during the term of the policy
On survival to maturity nothing is payable
The policy will not acquire any paid-up value
No Surrender Value will be available under this plan
No loan will be granted under this plan
Policyholder has an option to pay premium Yearly, Half-yearly, Quarterly
or Single Premium
A grace period of 15 days will be allowed for payment of yearly, half-
yearly or quarterly premiums
If death occurs within the grace period and before the payment of the
premium then due, the policy will still be valid and the Sum Assured paid
after deduction of the said premium as also unpaid premiums falling due
before the next policy anniversary of the Policy. If the premium is not
paid before the expiry of the days of grace, the Policy lapses.
“KEYMAN INSURANCE”
42
Benefits
On Death: Full sum assured + loyalty additions
On Survival: Nothing is payable.
Other Conditions
Minimum age at entry : 18 years
Maximum age at entry : 50 years
Maximum age at maturity : 60 years
Policy Term : 5 to 25 years
Minimum Sum Assured : Rs.5,00,000
Maximum Sum Assured : Rs.3,00,00,000
Requirements for the Keyman Insurance Proposal
Form No. 340 should be submitted by the person authorized by the
company.
MHR in specified form by marketing manager/sales manager.
Firm's resolution to take KMI containing the name of the key-employees,
amount of cover, plan & term. Authorized person on the letter head of the
firms duly signed by the authorized person with stamp.
Necessary medical report from the medical examiner.
Other Medical Requirements will be the same as for individual insurance
on the Life of A.L.A. Previous Insurance on his life if to be taken into
account while considering SUC.
Copy of Memorandum and Articles of Associations.
“KEYMAN INSURANCE”
43
COPIES OF Audited Balance Sheet and Profit and Loss accounts for
preceding 3 Years.
Certified True Copy of Board Resolution Passed in the meeting of Board
of Directors containing following Information;
Desired Sum Assured
Plan / Term
Name & Signature of the person who is authorized to complete the
proposal papers.
Seal of the company.
Keyman questionnaire is to be completed in the prescribed format and the
same is to be signed by the authorized person under the seal od the
company.
Copies of I.T. returns of the company for preceding 3 years.
“KEYMAN INSURANCE”
44
POLICES AVAILABLE UNDER KEYMAN INSURANCE IN
ICICI
ICICI Pru Secure Plus (ICICI PRU Life)
Suitability
The policy is an endowment products with some degree of flexibility and
transparency and suitable for people who are looking at investment option with
good return and the security of the investment.
Salient Features
This is a flexible investment cum endowment plan.
The policy offers the flexibility of choosing three levels of cover (in the
form of sum assured) for the same amount of total annual contribution.
- Basic, Standard and Enhanced.
Basic (Term-5) x Annual Premium
Standard (Term) x Annual Premium
Enhanced (Term+5) x Annual Premium
The policyholder has the flexibility of shifting between the three levels
of cover. For each level of sum assured, applicable mortality charges
would be deducted from the premium.
The premiums paid would be invested after deducting the charges
involved in the product. These costs are related to policy issuance,
administration, servicing and mortality charges.
“KEYMAN INSURANCE”
45
At the end of every year, the company would declare a bonus interest
that would be applied on the allocable portion* of the premium. Policy
guarantees a bonus of 4% on the invested premium for the first year.
This bonus interest will have a compounding effect on the value of your
policy.
Loans can be availed of under this policy.
The policy benefits can be enhanced by add-ons by paying additional
premium. The sum assured under the riders cannot exceed the base sum
assured. The riders available under the policy are:
1. Critical Illness Rider (Accelerated)
2. Major Surgical Assistance Rider
3. Accident and Disability Benefit Rider
4. Accident Benefit Cover
5. Income Benefit Rider
6. Waiver of Premium Rider
Benefits
1. On Maturity
The accumulated value of the policy is paid at the time of maturity.
However, if the value of the investment is more than the accumulated
value of the policy then that too will be paid at the time of maturity.
Policyholder has the flexibility of receiving the maturity proceeds as a
lump-sum or in equal annual installments over 3 or 5 years. In the event
of death during withdrawal period, the remaining amount would be paid
to the beneficiaries. There is no life-cover during this withdrawal period.
“KEYMAN INSURANCE”
46
2. On Death
An amount equivalent to the sum of the chosen cover level along with the
accumulated value of the policy is paid.
Riders
Critical Illness Rider (Accelerated)
Major Surgical Assistance Rider
Accident and Disability Benefit Rider
Accident Benefit Cover
Income Benefit Rider
Waiver of Premium Rider
R
I
D
E
R
S
“KEYMAN INSURANCE”
47
1. Critical Illness Rider (Accelerated): In the event of the life assured
contracting a critical illness, the sum assured under the rider will be payable and
the life cover will come to an end. However, the accumulation in the policy
value continues and will be paid on maturity or death, whichever is earlier. The
cover is available till a maximum age of 65 years.
2. Major Surgical Assistance Rider: It offers cover against Major Surgical
Procedures. Depending on the surgery, 50%, 30% or 20% of the sum assured
under the rider will be paid. The cover is available till a maximum age of 65
years. Claims are not admitted for the first 6 months of the policy.
3. Accident and Disability Benefit Rider: It offers cover against Accident
& Disability. In the event of death due to accident, the nominee gets an
additional sum assured under the rider. a) In case of accidental death while
traveling by mass surface transport, the nominee will get twice the sum assured
under this rider. b) In the event of total and permanent disability due to an
accident, which impairs one's capacity to earn, 10% of the sum assured is paid
out every year for 10 years.
4. Accident Benefit Cover: On death of the life assured due to an accident,
the nominee gets an additional sum assured, under this rider.
5. Income Benefit Rider: In the event of death of the life assured, during
the applicable term under this rider, 10% of the SA is paid to the nominee every
year, till maturity.
“KEYMAN INSURANCE”
48
6. Waiver of Premium Rider: In case of total and permanent
disability due to accident, this rider would waive future premiums till
maturity.
Other Conditions
Maximum age:60 years
The maximum age at which cover ceases: 75 years
The minimum term of the policy: 10 years
The maximum term of the policy: 30 years.
Minimum premium
Keyman Insurance Methods
Many organizations make remarkable progress because of the availability of the
services of the technical experts, directors with long number of years of
experience. Absence of their service to the organization due to premature death
of such persons results in financial loss to such organizations.
An employer having such persons in his employment can take insurance policy
on their lives. The exact amount of insurance cover depends on, the amount of
loss the company is likely to sustain by the death of the key person plus the cost
the company may have to incur to find a suitable substitute and the expenses to
be incurred for training the new incumbent. It is rather very difficult to arrive
the exact sum assured. However certain methods are followed for determining
the sum assured.
“KEYMAN INSURANCE”
49
Method 1: Keyman's Compensation Package
Under this method ten times the annual compensation [Annual total
salary + Bonus + Notional value of perks (Invariable 30% of Annual
Salary)] paid to the keyman is considered as maximum sum assured
under the policy.
Method 2: Gross Profit Method
Under this method two times the average gross profit of last 3 years is
taken the maximum sum assured under all keyman policies of that
company
Method 3: Net Profit Method
Average net profit of last 3 years is taken into account and five times of
this amount is considered as sum assured under keyman policies. Net
profit means profit after depreciation and taxation.
For determining the amount of sum assured exactly the least of the
amounts arrived at on the basis of the above three methods is taken into
account.
Requirements
Proposals duly completed in form 340.
Copies of the audited annual accounts for preceding three years and
balance sheets and P&L account.
Copy of the Memorandum and articles of association of the company
Certified copy of the Board resolution passed in the meeting of Board
of Directors stating there in the name, quantum of insurance, plan and
term and the name of the authorized person signing the proposal &
allied papers.
“KEYMAN INSURANCE”
50
Key man questionnaire in the prescribed format
Plan allowed is Jeevan Shree
The policy is not be issued for a proprietary concern or partnership
firm.
Eligibility Conditions
Key man should not have beneficial interest exceeding 25% of the
shares of the company and his family's interest not more than 50% of
the capital of the company
The company should neither be running in loss nor show a profit
decline over the years.
Payment of Policy Proceeds
On maturity or death policy proceeds are paid to the company. In case of
retirement or resignation, the policy is surrendered and surrender value is paid
or the policy can be assigned to keyman for an amount equal to surrender value
for consideration and the keyman can continue payment of premium.
Tax Benefits
Premiums paid by company is allowed as 100% deductible business
expenditure v/s 37(1) of IT Act
The policy proceeds received by the company at the time of maturity or
death is treated as income of the company and is subjected to tax
In case the company assigns the policy to key man for "no
consideration" as benefit, surrender value proceeds paid is treated as
income for keyman.
“KEYMAN INSURANCE”
51
Misrepresentation by Life Insured
Materiality of Undisclosed Facts
Return of Premium
Background
In December 2002 a co-operative took out whole life insurance on the life of their
chief executive officer which policy included benefits in respect of dread disease
and accidental death. The policyholder was under the impression that the policy
also included disability cover but according to the insurer the reference to
disability in the policy contract was merely an option to take up disability cover in
the future.
The life insured had been involved in a motor vehicle accident in 1988 in which he
suffered an injury to his chest, left shoulder and the small finger on his right hand.
Although the medical report did not reflect this, he had also suffered concussion.
With a view to lodging a road accident claim the life insured consulted a clinical
neuro-psychologist in January 2002. At the time of the consultation the life
insured was complaining of bad memory, inability to solve problems and to
concentrate over a period of time. There was also evidence of anxiety in
interpersonal situations. He was advised that he would need treatment by a
psychologist or a psychotherapist over a period of 5 years.
In September 2003 the life insured left the service of the co-operative for health
reasons. Since he had been a key man, the co-operative, as owner of the policy,
submitted a disability claim to the insurer. At the time of concluding the contract
the life insured had disclosed that he had been involved in the motor vehicle
“KEYMAN INSURANCE”
52
accident in 1998. He failed to disclose that he had consulted a clinical neuro-
psychologist in 2002 and that he suffered from residual mental deficiencies
including post traumatic brain dysfunction, memory loss and difficulty to
concentrate, all of which was as a result of the motor vehicle accident in 1998. The
insurer denied liability on the grounds that policy did not provide disability
benefits. It, moreover, regarded the non-disclosure as material to the whole risk
and not only to any disability benefit. The insurer alleged that had it been aware of
the history of the insured, the terms as contained in the policy contract would not
have been offered. Consequently it cancelled the contract on the grounds of
misrepresentation. The insurer also invoked a clause in the policy, which provided
for the forfeiture of all premiums paid.
Discussion
There were three issues that needed to be resolved, namely:
1. What is the liability of a policyholder for misrepresentations made by the
life insured?
In principle a person is only answerable for his own misrepresentations.
He will also be liable where his employee made a representation in the
course of his employment; so too where the representation was made by
his agent who had been authorized to make the representation. In this
instance the misrepresentation came from a third party, namely the life
insured, who had not disclosed certain facts of which the policyholder
had no knowledge. But the life insured was also the CEO of the co-
operative policyholder that had taken out the policy on the life of the
CEO as a key man. Since the CEO was in fact the controlling mind of
the co-operative, we held that the knowledge he possessed as the life
insured should be imputed to the policyholder;
“KEYMAN INSURANCE”
53
2. Was the insurer entitled to cancel the contract on the grounds of non-
disclosure?
It were of the opinion that the facts were material for the purpose of the
insurance contract and concluded that the insurer was justified in
cancelling the whole policy;
3. Was the insurer entitled to retain all premiums paid (amounting to a total of
R27827)?
It was argued that the penalty clause could be subject to a reduction in
the amount payable if the penalty amount (the premiums paid) is out of
proportion to the prejudice suffered by the insurer. They requested the
insurer to advise us of the relevant amounts and when these were
furnished it appeared that the policyholder would be refunded an
amount of some Rs. 4,000. They questioned some of the insured’s
disbursements that had been taken into consideration in calculating the
amount of prejudice suffered.
Result
The insurer recalculated the figures, reduced some of the disbursements and
offered to pay an amount of Rs. 18,769 to the policyholder. The amount was
accepted.
“KEYMAN INSURANCE”
54
Although the Keyman Insurance policy was introduced as early as 1970s by
the Swiss re Insurance Co. and the LIC of India, it has gained prominence
only now due to the aggressive competitive business environment in the
post- liberalization India.
Loss of key employee or managing director whose absence may had a
drastic effect on the profit graph of the company is an exposure for which
modern organizations perforce have to envisage and take appropriate
coverage.
Keyman insurance is a good tool for the liquidity needs of the
company/firm/employer on loss of a keyman or partner, but is not a device
of tax planning for providing tax-free ex gratia payment to keyman or
partner, as it is made out to be.
Increasingly the keyman insurance has acquired the character of loan
protection insurance as it is being taken mainly ay the direction of the banks
and finance institution to ensure the recovery of the loan or liquidation of the
overdraft in case of death or exit of the key person from the organization.
The insurance law is silent with reference to the legal definition of keyman
insurance policy in India. So there should be a legal definition for perfection.