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Key person insurance, also commonly called key man insurance and key man insurance, is an important form

of business insurance. There is no legal definition for "key person insurance". In general, it 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 policys term does not extend beyond the period of the key persons usefulness to the business. The aim is to compensate the business for losses and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy. An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person. 'KEY PERSON INSURANCE' A life insurance policy that a company purchases on a key executive's life. The company is the beneficiary of the plan and pays the insurance policy premiums. Also known as "key man insurance", "key woman insurance" or "business life insurance". 'KEY PERSON INSURANCE' Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business.

WHO CAN BE A KEY PERSON? A key person can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company. INSURABLE LOSSES There are four categories of loss for which key person 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 specialised 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 business loans or banking facilities. The value of insurance coverage is arranged to equal the value of the guarantee.

FAQ for Keyman Insurance Policy


1. What is keyman insurance ? There is no legal definition. In general, it has the following features. An employer takes out an insurance policy insuring against loss of profits : arising from the death, sickness or injury of a key employee. The beneficiary is the employer. In the case of a life insurance policy, it is a term insurance, covering the life of the employee within the term of the policy, with no other benefits. The term does not extend beyond the period of the employee's usefulness to the employer. The purpose of taking out the insurance is to compensate the employer for the loss of trading income that may result from the loss of the service of the key employee in case of death, sickness or injury. Q 2. 2 Are the premiums paid on the policy by the employer deductible for profits tax purpose? Are the proceeds from the policy taxable? A The 2 premiums are deductible The proceeds are taxable as trading receipts of the employer, being compensation for loss of profits.

Q If the employer is a sole proprietor or a partnership and the insured 3. person is the sole proprietor or a partner, are the premiums paid on the 3 policy by the employer deductible? Are the proceeds from the policy taxable? A the premiums are not deductible. Even though the policy may be named No, as 3 a 'keyman policy', the Department would not accept that it is a real keyman policy. This is because a keyman policy is applicable only in the case of an employer and employee relationship. A sole proprietor or partner is not an employee. The premiums are regarded as private expenses. The proceeds are not taxable.

Q If the employer is a limited company and the insured person is a 4. director who owns substantial shares in the company, are the premiums 4 paid on the policy by the employer deductible? Are the proceeds from the policy taxable? A the premiums are not deductible. The situation is, in substance, similar No, to 4 the case where the insured keyman is the sole proprietor or a partner. The Department considers that the purpose of the policy is to protect the value of the shares because the life or well-being of the director, being the keyman, would significantly affect the value of the shares. The premiums are of a capital nature. In this connection, generally a shareholding of 20% would be regarded as substantial.The proceeds are not taxable. Q If the proceeds of a "keyman insurance policy" are payable to the 5. family members of the employee or the employer is contractually 5 required to pay the proceeds to the family members of the employee, are the premiums paid on the policy by the employer deductible? Are the proceeds from the policy taxable? A the premiums are not deductible. The purpose of the policy is not to No, compensate the employer's loss of profits, but to protect the family of the 5 employee. The proceeds received by the employee's family are not taxable. Q If the policy is not a term policy, but is a life policy carrying a 6. surrender value or an endowment policy, are the premiums paid on the 6 policy by the employer deductible? Are the proceeds from the policy taxable? A the premiums are not deductible. They are regarded as expenditure of a No, capital nature. 6 The proceeds are not taxable. Q Sometimes, the policy may have an add-on element. For example, the 7. employer pays extra premiums on top of the normal premiums so that

7 the death of the employee certain benefits (e.g. one year salary) on would be paid to the family members of the employee. Are the whole premiums paid on the policy by the employer deductible? Are the proceeds from the policy taxable? Only the normal premiums are deductible. The extra premiums are not deductible. The proceeds received by the employer are taxable. The proceeds received by the family members are not taxable. Q If the policy is an investment-link policy, are the premiums paid on 8. the 8 policy by the employer deductible? Are the proceeds from the policy taxable? The premiums for the investment portion are not deductible because they are of a capital nature. Only the premiums for the risk portion are deductible . An apportionment of the premiums is necessary. The proceeds relating to the investment portion are not taxable. The proceeds relating to the risk portion are taxable. Q If the employer is required under the law to pay compensation to the 9. employee on injury or death etc. and the employer takes out an 9 insurance policy to cover such legal obligation (e.g. workers' compensation under the Employment Ordinance), are the premiums paid on such policy deductible? Are the proceeds from the policy taxable? Yes, the premiums are deductible, being normal business expenses. Such policy is not a keyman policy. The proceeds are not taxable.

Q 1 10. 0 If the employer paid premiums on an insurance policy taken out for the purpose of providing funds to any person (e.g. one of the partners), in the event of death of an insured person (e.g. the other partner), to acquire partnership interests or shares of a limited company, are the premiums paid on such policy deductible? Are the proceeds from such policy taxable? (Note: Normally, the main purpose of such insurance arrangement is to prevent cessation of business by reason of the death of an owner of the business.) No, the premiums are not deductible. The premiums are regarded as private : expenses or capital expenditure. The proceeds are not taxable.

KEYMAN INSURANCE PERSONAL GUARANTEES


What are keyman insurance personal guarantees for business risks? This is keyman insurance for those who provide personal guarantees. Suppose a business takes out a loan. The lender will most likely require a personal guarantee, a charge on their personal property, or other collateral. This is particularly true of new businesses. If a guarantor should become critically ill or should die, lenders may call in the loan. Sometimes lenders require small companies to buy keyman insurance with the lender as beneficiary. If not, and the business is in the position of having to repay the loan after a death at the company, keyman insurance can save the entire business from failing. A small business's keyman insurance policy can be written specifically to pay off the loan, enabling the company to remain in business. This policy is separate from any keyman insurance policy that has the business itself as beneficiary, which is highly recommended for new and small businesses.

What are keyman personal guarantees for professional indemnity? Depending on the nature of the business, keyman insurance covering professional indemnity may be a wise investment. Personal guarantees for professional indemnity covers the company in the event that claims are brought against the company holding the policy because of some professional negligent. Professional indemnity keyman insurance generally covers the company in the event of a negligent act, or some sort of omission or error, a breach of professional duty, or some form of civil liability. This type of insurance is bought by businesses that provide advice to clients. Coverage may be voluntary or involuntary. Involuntary coverage means that the business is required by law to purchase the coverage. Types of businesses that purchase insurance covering professional indemnity include medical services, legal services, consulting, architecture, and financial services and accounting. Medical and legal businesses are required to have the coverage. What are keyman personal guarantees for long term illnesses? The death of a key employee is not the only event that can cause a small business to go bankrupt. The long term illness of a key employee can cause similar financial risk to a company. Some lenders may require that a company borrowing money take out key employee critical illness coverage with the lender as beneficiary so that the lender is protected in case of the critical illness of a key employee. This policy would be separate from a key employee critical illness policy that has the business as beneficiary. A new or small business can fail if one of its key employees falls ill with a critical illness. Insuring against this with a keyman policy will allow the company to carry on in the absence of a key employee due to illness. The proceeds from such a policy can be used to keep cash flow going, to hire a temporary replacement, or to meet other expenses that would occur with the illness of a key staff member.

What are keyman personal guarantees for life and critical illness? Sometimes a lender-required keyman insurance policy (with the lender as beneficiary) will provide coverage in the event of the death or serious illness of a key person. Because the long-term illness and absence of a key staff member can wreak financial havoc at a small or new business, lenders may ask that critical illness be covered as well as the life of key employees. There are policies that cover both. Such a policy with the business as beneficiary is an extremely good idea with new or small businesses, because it will greatly lessen the chances that the business will go under should a key employee die or fall ill and have a prolonged absence.

KEYMAN INSURANCE CRITICAL ILLNESS What is keyman group critical illness insurance? Group critical illness keyman insurance provides keyman benefits to a company in the event that a key employee develops a critical illness. Individual critical illness plans are becoming too expensive for many companies to afford. Therefore group critical illness insurance pools risk, allowing companies that couldn't afford individual keyman critical illness insurance to buy this type of coverage. Businesses must compare group critical illness policies carefully due to the range of coverages and prices. Many insurance professionals recommend buying a group critical illness policy as a standalone policy in order to take advantage of better terms and rates and to allow pre-existing conditions to be "grandfathered" in. Otherwise, employees with certain pre-exisiting conditions could be denied claims. Two very important things to consider with group critical illness coverage are the particular wordings in the policy and the pre-existing conditions clause. Some 80% of denied claims are because of pre-existing conditions, and the other 20% are because of failure of the illness or condition to satisfy a definition in the policy. Finding a policy with no pre-existing condition clause, and finding a plan with the most generous policy definitions are two keys to getting the best in keyman group critical illness coverage.

How are keyman insurance critical illness policies written? Keyman insurance policies for critical illness generally have exclusions written in. For example, they may cover every type of cancer, with the exceptions of slower-growing forms of prostate cancer, lymphoma, and skin cancer. It is actually quite rare for claims to be made against critical illness policies, because most people who contract cancer do so after retirement age, which is exactly the age at which critical illness coverage is canceled. There are keyman critical insurance companies that engage in "policy churning" in which they recommend that policies be reviewed every five years to shop around for better deals. For many companies, this is a way for financial advisors to receive regular commissions, which can be quite lucrative. Other alternatives to this type of insurance include income protection coverage, which will cover income if an employee must be off work due to non-fatal and non-critical illnesses that would not be covered in a critical illness policy. How does someone get a keyman insurance critical illness quote? It is easiest to get keyman critical illness quotes online, but be aware of what the policies cover. The coverage is just as important as the cost of the premiums. Some keyman critical insurance policies have especially limited coverage, with only eight of 10 diseases covered, as compared to the leader in the critical illness insurance market, Swiss Life, which covers 38 types of illnesses. Many insurers do not cover conditions like deafness, blindness, loss of speech, and diabetes. AIDS and Parkinson's disease are two other conditions generally not covered by the typical High Street insurance agent. The term "total and permanent disabilities" is also found in keyman critical illness quotes, covering people for any ailment that prevents a person from working permanently. Pay particular attention to the wording on total and permanent disabilities. Some policies state they will cover inability to perform any occupation, and other policies state that they will cover the inability to perform the job they have at the time the policy was purchased. Clearly businesses benefit more when the employee is

covered if he or she cannot do the job normally performed at the business, rather than if he or she must be so incapacitated that no work of any kind is possible.

Tax benefits
A Life Insurance policy is one of the most preferred investment avenues in India as it helps in tax planning. However, when you invest in a life insurance policy, don't measure it in terms of "tax benefits"; measure it in terms of "life benefits" that it has to offer.

Your life is your greatest investment and your family is your biggest asset. And when you invest in a life insurance policy you ensure a financially secured future for your loved ones. Hence, before you invest in anything, invest in your life.

Your Life insurance policy offers you dual benefits: Comprehensive financial protection against unforeseen events for your family Tax benefits on your monetary investments

By investing in a Life Insurance policy, you can avail the following benefits under the Income Tax Act, 1961:

Deductions from gross income Sec 80C Deduction is available amounting to Rs. 1,00,000/The benefit for life insurance premium u/s 80 C is restricted to 20% of the actual capital sum assured. Surrender of Plan before premium has been paid for two years will result in reversal tax benefit.

80CCC Deduction in respect of contribution to pension funds Maximum Rs. 1,00,000/Surrender/Withdrawal will be subjected to tax. Pension received will be subject to tax.

Sec 80 CCE Under Section 80CCE, the overall limit for deduction u/s 80C, u/s 80CCC and u/s 80CCD is Rs. 1,00,000/-.

80D Deduction in respect of medical insurance premium

Individual or HUF whether resident or non resident

Premium can be paid by any mode other than cash Premium paid out of income chargeable to tax. For normal individuals the maximum deduction is Rs.15,000/- and for senior citizens age 65 years and above the deduction is Rs. 20,000/-.

Additional deduction allowed for individuals for taking health insurance for parents as under:

Where parents are aged below 65 years

Rs. 15,000/-

Where parents are aged 65 years & above

Rs. 20,000/-

Exemption from the proceeds Commuted pension: 10(10A)(iii)

One-third of the Value at vesting date would be tax-free

10(10D) Any sum received from Life insurance policy as maturity proceeds, death benefits. Proceeds of key man insurance is taxable Single premium policies will be taxed as income in the year it is received assuming the premium exceeds 20% of the sum assured. An Insurance policy in respect of which the premium payable for any of the years during the term of the policy exceeds 20 % of the actual capital sum assured will not be eligible for Sec 10(10D) benefit. This will not be applicable for any sum received on the death of a person.

Disclaimer

The above are extracts from the Income Tax Act, 1961. Please note that tax laws are subject to change and hence before placing reliance on the above, the latest version of the above section should be checked up. It should also be noted that the change in tax laws could have retrospective effect also. This information should be not be construed as tax, legal or investment opinion from BSLI. BSLI would not be responsible in any manner for decisions made on the basis of above information. Please consult your tax advisor for specific suitability of taxation on insurance products.

Key Man Insurance Plans


These are the policies taken by a company to secure against sudden loss (by death) of its key employee(s) who may be senior managers or directors or other employees with the technical expertise that is valuable for the companys future and profits. Generally the companies set off the premiums paid towards their Key Man policies against their business expenses. LICI, however does not assure or accept any responsibility for the tax treatment of the premiums paid by companies towards keeping their key man policies in force. Nor does it, in respect of the tax treatment of the proceeds received from LICI towards the surrender value or maturity value or claim by death of the key man. These are the issues to be resolved by the Companies and their accountants with the Inland Revenue Department.

The following plans are available for Key Man Insurance

1. All Endowment Assurance Plans 2. All Whole Life Plans 3. Money Back Plans 4. Term Assurance Plans

1.Endowment Assurance Plans LICI's Endowment Assurance plans allow you to target a specific long term goal such as your retirement savings, childs higher educational needs, etc and allow you to start saving immediately. The life insurance element ensures that the motive behind the savings plan is fulfilled even if the policyholder is no more; the targeted sum along with vested bonuses is

payable to the intended beneficiary in case of unfortunate death of the life assured during the term of the policy. Some of the highlights of the endowment assurance plans are: World-wide risk coverage Low premiums, High returns and fixed term of insurance Policy loan facility after 3 years.

Endowment Assurance Plan With Profits (Plan 614) Life Insurance cover from ages 12 to 65 years. Age at maturity should be 75 or less. Quantum of insurance cover depends up on ones income & health. Premiums are payable throughout the term of the policy as per the agreed mode Basic Benefits: Death Benefit Payment of the sum assured + the vested bonuses on death of the life assured during the term of the policy. Maturity Benefit Payment of the sum assured + the vested bonuses on the date of maturity of the policy. Terminal Illness Benefit 50% of the sum assured is payable if the life assured becomes terminally ill and the balance along with the vested bonuses is payable on the death of the assured

Optional Benefits: The optional benefits are available on payment of additional premiums over and above the basic premiums. These are not automatically available to all the policyholders; they may be denied to some persons depending upon their health, age, physical disability, occupation, etc. There is also a cap on the maximum benefit payable under all LICI policies of the life assured, put together:

Rider Accident Benefit Critical Illness Rider Term Assurance Rider


Sum Assured Cap $200,000 $100,000 $100,000

Accident Benefit Rider package (accidental death benefit + total and permanent disability benefit + premium waiver benefit) Critical Illness Rider Benefit Term Assurance Rider Benefit

Endowment Assurance (Limited Payment) Plan With Profits (Plan 48F) This plan is similar to Table 14 except that it offers more flexibility to its policyholder to pay his entire premiums within a limited (pre-determined) term called premium paying term. This plan is especially useful to those persons having relatively shorter but highly rewarding careers or periods of their career such as people on special short term contracts, foreign postings, fashion models, movie stars, etc.

Single Premium Option Choice of Policy Terms (Years) Limited Payment Option Policy Term 15 20 25

5,6,7,8,9,10, 15, 20, 30, 35, 40, 45, 50

Choice of Premium Paying Terms (Years) 1,5,10 1,5,10,15, 1,5,10,15,20

Basic Benefits: Same as under Endowment Assurance Plan With Profits (Table 14F) Optional Benefits: Same as under Endowment Assurance Plan With Profits (Table 14F) subject to the following conditions:

Accident Benefit Rider & Term Assurance Riders: These benefits are available for the entire policy term while the (limited payment including the single premium) riders premiums are collected along with the basic premiums during the premium payment term itself.

Critical Illness Riders: Critical Illness Rider is not available for Single Premium Options. In case of Limited Payment Options, the rider is available only during the premium paying term.

2.Whole of Life Plans Whole of Life plans are ideally suited to those people who do run their own businesses and hence do not ever need to retire. A whole of life plan can be an important component of ones estate planning. These plans are available from ages 18 to 60 years. There are three types of Whole of Life Plans as listed below. The following are the important highlights of LICIs whole of life plans: World-wide risk coverage Lower premiums, Highest Bonuses Policy loan facility after 3 years.

'Long Life' -Whole of Life Plan with Profits (Table 2F) The whole of life premiums are generally payable though out the lifetime of the policyholder and the policy monies (sum assured + vested bonuses) are returned to his beneficiaries only on the death of the policyholder. However, LICI provides an extra benefit to its Whole of Life policyholders it treats the policy as matured as soon as the life assured crosses 80 years of age (subject to the condition that the policy must have completed at least 40 years from the date of commencement) and pays the sum assured + bonuses vested till that date; policy will be terminated on payment of the maturity value.

Basic Benefits: Death Benefit Payment of the sum assured + the vested bonuses on death of the life assured. Maturity Benefit Pays the sum assured + bonuses vested till that date to the policyholder after his 80th year of age or after the policy has completed a minimum duration of 40 years from the commencement date, whichever comes later; policy will be terminated on payment of the maturity value. Terminal Illness Benefit 50% of the sum assured is payable if the life assured becomes terminally ill and the balance along with the vested bonuses is payable on the death of the assured.

Optional Benefits: Accident Benefit Rider package (accidental death benefit + total and permanent disability benefit + premium waiver benefit).

Convertible Whole Life Plan With Profits (Table 28F) A convertible whole life plan is available for ages between 16 and 50 years at entry. Under this plan the policyholder has an option to convert the Whole Life Plan into an Endowment Plan with a specified term (of 5 more years and upwards) after completion of 5 years.

This option may be exercised at the proposal stage itself or in the 5th year. On the other hand, if the conversion option is not exercised, the policy continues as a whole life plan with premium payment ceasing at age 70. Basic Benefits: Death Benefit Payment of the sum assured + the vested bonuses on death of the life assured.

Maturity Benefit: - If Conversion Option is Not Exercised: See under Long Life Whole Life Plan With Profits (Table 2F) - If Conversion Option is Exercised: Maturity value is settled at the end of the chosen endowment term just as mentioned under Endowment Assurance Plan With Profits (Table 14F)

Terminal Illness Benefit: 50% of the sum assured is payable if the life assured becomes terminally ill and the balance along with the vested bonuses is payable on the death of the assured.

Optional Benefits: The Accident Benefit Rider package is available only during the premium paying term and not for the entire term of the policy .

3.Money Back Plans (74F, 75F, 93F) LICI's Money Back Policies are the best way to combine life insurance and liquidity. These are the most popular plans sold in Fiji. Periodical money back in lump sum can be reinvested in a more profitable scheme or simply utilised for an emergency family need or fund that longstanding family vacation. Money Back Plans are available between ages 12 and 55 depending up on the term of the plan.

In all the money back plans, money is returned to the policyholder in the form of periodical survival benefits. Risk cover on the life of the assured continues for full sum assured even after payment of survival payments. On survival of the assured up to the date of maturity, the last survival benefit is paid out along with the vested bonuses under the policy.

Table of Survival Benefits (% of the Sum Assured) payable under Money Back Plans: Plan 74F 75F 93F Payable After 5 Years 25% 20% 15% 10 Years 25% 20% 15% 15 Years 50% 20% 15% 20 Years 40% 15% 25 Years 40% BASIC BENEFITS: Death Benefit Payment of the sum assured + the vested bonuses on death of the life assured during the term of the policy.

Maturity Benefit Payment of the last survival benefit + the vested bonuses on the date of maturity of the policy.

Terminal Illness Benefit 50% of the sum assured is payable if the life assured becomes terminally ill and the balance along with the vested bonuses is payable on the death of the assured.

OPTIONAL BENEFITS: The optional benefits are available on payment of additional premiums over and above the basic premiums. These are not automatically available to all the policyholders; they may be denied to some persons depending upon their health, age, physical disability, occupation etc. There is also a cap on the maximum benefit payable under all LICI policies of the life assured, put together. Rider Accident Benefit Critical Illness Rider Term Assurance Rider Sum Assured Cap $200,000 $100,000 $100,000

Accident Benefit Rider package (accidental death benefit + total and permanent disability benefit + premium waiver benefit) Critical Illness Rider Benefit

4.Term Assurance Rider Benefit LICI's Aspire, the new childrens educational plan will help you realize your dreams about your childs future. The plan aims at providing for your childs secondary and tertiary educational needs. You can take out a policy under this plan on your child right from the just born to 10 years of age and start saving right away. The Plan provides for returning of the sum assured under the policy in seven annual survival benefits from the age 14 of the child assured under the plan. The policy matures on the childs 20 year of age; the last survival benefit is payable along with the vested bonuses. The Maximum Sum Assured Available Under all Aspire Plans for each child is $100,000.

BASIC BENEFITS Survival Benefits: You can choose from one the following three cash flows as annual survival benefits for your child. These survival benefits are meant for meeting (partly or fully, depending upon the sum assured opted under the policy) the childs secondary and tertiary education. These survival benefits fall due on the date of every policy anniversary falling due on or after the childs attaining 14th year through 20th year. Maturity Benefit: The policy matures on the policy anniversary falling on or after the childs attainment of 20th year of age. The last (seventh) survival benefit is payable along with the vested bonuses under the policy as maturity benefit. Death Benefit: Commencement of Risk: Risk cover on the life of the child assured under the policy commences from the date of the policy anniversary falling on or after his or her attainment of 10th birthday . Death after the Commencement of Risk: Full Sum Assured is payable

along with the vested bonuses without deducting the survival benefits that may have been already paid out in case of the childs unfortunate death after the commencement of risk cover. Death prior to the Commencement of Risk: In case of unfortunate death of the child prior to the date of risk commencement (as explained above), the premiums paid till that date are returned to the proposer.

OPTIONAL BENEFITS The following optional benefits are available under the Aspire Plans on payment of additional premiums. Both these riders cover the risk on the life of the proposer and are enormously useful to opt for.

Premium Waiver Benefit: Waives premiums in case of unfortunate death of the proposer under the policy during the term of the policy. Proposer is the sponsor of the policy. If he is no more, the child assured or his or her family may not be able to afford to pay the premiums. Waiver benefit ensures that the educational needs of the child are met unhampered under such circumstances. However, there may be some restrictions regarding the age of the proposer for granting this rider cover.

Term Assurance Benefit: Pays an amount equivalent to 20% of the basic sum assured as a token of relief to the family in case of unfortunate death of the proposer during the term of the policy. There may be some restrictions regarding the age of the proposer for granting this rider cover.

Smart Life 2 Plan (Plan 135F) Welcome to our new investment oriented plan Smart Life-2. It is unlike a normal life insurance policy. Listed hereunder are its important features:

It is a single premium plan the entire premiums are paid upfront, at the time of taking the policy; the value of the premium is well below the value of the policy or the sum assured under the policy.

The policy is for a fixed term of 10 years. Guarantees an interest rate of 3% per annum (Guaranteed Additions) throughout the policy term. In todays falling interest rate regime, such a long term guarantee is rare and hence this is a huge attraction. Imagine a fixed deposit that also covers your life risk! For very nominal extra premiums, you can opt for an additional term assurance cover as well as accidental death cover equal to the basic sum assured under the policy. This is the real clincher! One can enjoy a life insurance cover for 10 years and up to $100,000 for just a fraction of the premiums that you would have to pay for a normal insurance policy. Policy Loan facility is available after one year. Policy can also be surrendered for cash after one year. Maximum sum assured under the policy is $100,000. Premium Rebates are available for high sum assured policies.

Conditions: Age at Entry: 20 to 60 years. Maximum Age at entry for opting Term Assurance Cover: 50 years last birthday. Maximum Age at entry for Accidental Death cover: 55 years last birthday. Unlike the oher policies, the Accident cover under Smart Life 2 Plan does not include Premium Waiver or Total & Permanent Disability benefits.

Basic Benefits Death Benefit: Payment of the sum assured + the guaranteed additions made till the date of death of the life assured during the term of the policy.

Maturity Benefit: Payment of the sum assured + the guaranteed additions for the entire policy term of 10 years.

Optional Benefits: The optional benefits are available on payment of additional premiums over and above the basic premiums. There may be some restrictions on the optional benefits depending upon health, age, occupation, physical disability, etc. There is also a cap on the maximum benefit payable under all LICI policies of the life assured, put together.

Accidental Death Benefit: One additional sum assured is payable if the death of the life assured under the policy takes place due to an accident during the term of the policy. There are some restrictions in granting this benefit. As mentioned earlier, this benefit doesn't cover 'Premimum Waiver' and/or 'Total & Permanent Disability'. Term Assurance Rider Benefit: One additional sum assured is payable if the death of the life assured under the policy takes place (accidental or normal) during the term of the policy. There are some restrictions in granting this benefit.

Financial Daily from Saturday, May 21, 2005

THE

HINDU

group

of

publications

What's spooky about keyman S. Murlidharan THE concept of keyman insurance must be a product of the insurance industry's hard sell because the discerning, leave alone the cynic, finds its rationale guarding against the loss on account of death of key persons difficult to stomach.

The policy is of a piece with another insurance product the loss of profit policy. But while loss of profits due to disruption can be reasonably estimated, can one put a figure on the possible contribution to be made by individuals to the fortunes of an organisation? Family-owned enterprises and eponymous companies are especially falling over themselves to be one up in the game if your promoter has been insured for Rs 2 crore, I would insure mine for Rs 5 crore seems to be the refrain. The very idea of keyman insurance raises some fundamental issues. Is anybody so indispensable to an organisation that his dissociation would bring its activities to a standstill? At any rate, the compensation received from the insurance company may at best be enough to neutralise the loss to the organisation emanating out of the sad demise of the keyman for a year or two which makes the whole idea illusory and evanescent. What would happen thereafter? To be sure, the organisation would not have taken a policy to compensate for his loss for all times to come. What happens if the keyman himself, untrammelled by the typical Japanese sentiments of life-long loyalty, switches to or allows himself to be ensnared by another organisation? How would the organisation be compensated in that event? The definition of the term `keyman insurance policy' given by Explanation to Section 10(10D) of the Income-tax Act 1961 is as follows: "... means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the firstmentioned person... " Section 28 (vi) for good measure makes it explicit that the proceeds of the keyman insurance policy would be taxable as business income. While this should be the logical culmination of a keyman insurance policy, the income-tax law also contemplates such policies being assigned in favour of the keyman himself when Section 17(3)(ii) thereof brings into the salary tax net the proceeds of such policies received by the keyman.

The definition of the term `keyman insurance policy' given in the Act also raises many issues. Why should it countenance the possibility of an organization taking a policy on an ex-employee or for that matter on anyone who was even remotely connected with it? The Indian experience has been that the keyman insurance policy is sooner or later assigned in favour of the keyman himself. This strikes at the very roots of the policy. If the organisation wanted to guard itself against the loss of a precious human resource, how can it be allowed to indulge in such mindless selfabnegation subsequently? This then exposes the whole exercise as being right from the inception an exercise in self-aggrandisement and tax saving. The Act should be amended to disallow retrospectively the entire premia thus far paid on policies assigned to others. Alternatively, fringe benefit tax (FBT) should be payable on such premia which turnout in hindsight to be for individual benefit as opposed to the altruistic interest of the organisation. In that event, Section 10(10D) must be amended to spare the estate of the deceased keyman from tax liability on proceeds that has already been taxed in the hands of the employer either by way of disallowance or FBT. This is to ensure that the same amount is not taxed twice over once in the hands of the employer and again in the hands of the deceased employee. Another farce that is being enacted by Indian corporates with regard to keyman insurance polices is to use them as a short-term tax saving expedient. With the lowering of corporate tax rate effective assessment year 2006-2007, corporates have, hot on the heels of Budget 2005, liberally paid keyman insurance premium to reduce their tax bill for the assessment year 20052006. The policies would be surrendered the very next year notwithstanding the resultant tax liability on the proceeds thus received because the savings

made in tax liability on account of the premia would be much more than the tax they have to pay on the surrender value the next year, thanks to the lowering of the corporate tax rate. The IRDA is rightly incensed over this. But can it prevent corporates from surrendering the life policies or for that matter can it stop them from assigning such policies to the keymen themselves? The Act, too, cannot be amended for neutralising this one-off advantage scored by the corporates.

All You Wanted To Know About Keyman Insurance

Key man insurance is a coverage that will protect company in the case of an untimely death or disability of a top salesperson, executive or business owner. Key persons are those within a business who are vital to the businesss profitability and continued financial success. There may be more than one key person within any business. Why to buy Keyman Insurance Policy? In case of an unfortunate eventuality to the 'keyman', two types of losses can arise for the company (a) Loss arising from profit reduction for the company and (b) Costs for the company in replacing the keyman. Eligibility for keyman insurance The Keyman Insurance (KMI) is allowed to the employee, if he satisfies the following condition 1. The keyman should hold less than 51% shares of company. 2. The total number of shares of the company held by the keyman and his family should be less than 70% 3. The keyman should be literate.

How to decide the Insurance Worth of a Keyman? The Sum Assured under key man insurance can be decided by using the following methods A. The max S.A. for key man insurance is restricted to 10 times of the keymans 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. B. Method of gross profit 3 times of the average gross profit (profit before

depreciation) of three years. C. Method of net profit 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. Key man insurance to employee of partnership firms 1. Max allowable KMI cover to partnership firms - 3 times of average gross profit of 3 year. Or 5 times of average net profit of 3 year, whichever is lower. 2. The max. Amount of cover will be distributed among the key partners. 3. Key Man Insurance can be given on the lives of more than one partner.

Advantages of keyman insurance to the company


1. In case of death of a keyman the company gets money to cope up with the loss 2. Any company buying keyman insurance for its employee can claim a deduction for the premium paid for the policy as a business expense under Section 37(1) of the Income Tax Act. 3. No advance intimation/approval is necessary from the Income Tax authorities to claim deduction of insurance premium payment. 4. The fact that the employee/directors life is insured for a large sum that will be paid by insurance company to his family if he dies, it is bound to ensure loyalty and avoids employee turnover. 5. For the executives earning high salaries, this policy can be given as a hike in salary and save on the tax outgo. 6. It helps the company in its tax planning. 7. The directors can also safeguard their immediate family from getting affected by the vagaries of the industry and the various business cycles that company has to face. 8. Insulate the risk of financial loss against loss of a Keyman. 9. Interest on loans taken against a keyman insurance policy may also be allowed as business expenses. 10. 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 companys

request is accepted by the assessing authority. 11. 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. 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, 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.

Objective
If creates a cost-effective funding scheme that provides a business entity with a lump sum cash to deal with the adverse consequences in the event that the significant and valuable employee(s) is diagnosed with a critical illness , total and permanent disability or death.

Keyman insurance: It pays to be insured!

"Life insurance isn't meant for people who die. Life insurance is meant for people who live." Who said this doesn't really matter, what matters is that there is an important lesson to learn from this. The basic tenet of life insurance is to indemnify the survivors against financial loss. 'Keyman' is one such type of insurance. 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 organisation. In case of an unfortunate eventuality to the 'keyman', two types of losses can arise -- (a) Loss arising from profit reduction for the company and (b) Costs for the company in replacing the keyman. 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. Let us take a brief look at the pros and cons of buying keyman insurance.

Plans Allowed under Key man Insurance:


Anmol Jeevan I Amulya Jeevan I

Objective Of Key man Insurance (KMI): The objective of keyman Insurance is to protect the company from the adverse financial effect by the Key Employee or Key Directors death by making funds available to the company in his absence. The companys progress and profit, usually depends upon the vital decision or technical expertised skill, knowledge, entrepreneurial vision of its Key Director or Key Employee, particularly in this competitive Globalised marketing Environment. Today companies expansion diversification, and setting up policy depends upon its far sighted vision, decision, technical know-how of the Key Director and Key Employee and thats required to be secured by purchasing Key man Insurance for making funds available for promoting, recruiting in the absence of Key-man. This policy is specially purchased by the company (both Pvt. and Ltd. Companies.) for the life of its most important Key person. Benefits to the Company:

Insulate the risk of financial loss against loss of a Keyman. Premiums paid under keyman insurance may be fully allowed as Business Expenses under Section 37(1) of the Income Tax Act, 1961, subject to satisfaction of the assessing authority. 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 companys request is accepted by the assessing authority. Keyman Insurance policy is a positive measure to improve the retention of the key man in the company.

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 key-mans life.


Key-mans 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:

Proposer the company Term- 10-15 years on the basis of retirement age or service contract. Accident benefit and nomination are not allowed. Assignment is allowed only in case of absolute assignment in favour of the key-man if he leaves the job of the company. In the standard policy forms following changes should be done while issuing the key-man insurance. Delete the words nominee under section 39 of the insurance act. Write the name of the life assured and proposer. Place the following endorsement on the policy:either absolute assignment in favour of the life assured (KM) or surrender to LIC for its cash value. Max. age at entry 65 years. Maturity age 75 years.

1. 2. 3. 4.

Keyman Insurance proposal requirements: 1. Copy of Memorandum & Articles of Association 2. Copies of Audited Balance. Sheet and P&L A/Cs for previous 3 years

3. Certified true copy of board resolution passed in the Meeting of Board of Directors containing following information:

Sum assured desired Name & sig. of the person who is authorised to complete proposal papers The use of seal of the company

4. Key man Questionnaire is to be completed in the persons hand format and the same is to be signed by the authorised person under the seal of the Company 5. Copies of I.T.returns of the Co. for proceeding 3 yrs 6. Consent for the endorsement to be placed on the policy 7. Revised Key Man Questionnaire annexed is to be attached. The S.A. under key man insurance can be decided by using the following methods:

The max S.A. for key man insurance is restricted to :-

10 times of the keymans 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:- 3 times of the average gross profit (profit before depreciation) of three years. Method of net profit:- 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.

Note:- no key man insurance (KMI) can be issued in case of companys profits/ turnover is declining, unless there are very special circumstance. Max. S. A. in case of private Ltd. Companies or closely held public limited companies: (i) no. of shareholders/employees- 10 or more

(ii) max .S.A to be treated at par with public Ltd. companies (iii) no. of shareholders/employees more then 5 but less then 10 (iv) max .S.A. 3 time the last 3 yrs average net profit(before tax) Max S.A. under KMI for the recently established companies in case of audited P&L accounts are present. Key man insurance to employee of partnership firms:

1. Max allowable KMI cover to partnership firms

3 times of average gross profit of 3 year. Or 5 times of average net profit of 3 year, whichever is lower.

2. The max. amount of cover will be distributed among the key partners. 3. Key Man Insurance can be given on the lives of more then one partner.

Income tax rules :

In case of S.B. is payable under the plans, will be considered as the business income of the company & will be taxable under section 28 (vi) of the income tax ACT. Under section 31(1) of the income tax Act the premium paid under key man insurance can be claimed by corporate entities as bonafide business expenses. If the policy has been assigned to the key man, the policy-proceeds including bonus will be taken as profit under section 17 (clause) of the income tax Act. If the director of the company is the assignee under the key man policy, it will be taken as income from other sources and will be taxable according to the section 56 (2ic) of the income tax Act.

Case study ON KEY MAN INSURANCE

Dave is an IT Consultant for a furniture supply company, Samuels Furnishings Ltd. He has specialist knowledge relating to the companys IT systems, and understands the accounts and administrative systems of product supply companies. The staff at Samuels Furnishings rely on Dave for ongoing maintenance of their IT systems, and to fix any IT problems that they encounter so that they can carry out their roles. Unfortunately, Dave has a major heart attack and therefore has to finish work. Samuels Furnishings took out a keyman insurance policy, which included critical illness benefit for an amount of 800,000. Because Dave is named as one of their key people, and his illness is defined by the policy as a critical illness, they received a payout for the sum of 800,000. This enabled them to source a replacement from the freelance market and cover recruitment costs and his salary until they could find a permanent replacement or until Dave was fit to return to work. They were also able to pay for temporary staff to help out with the administrative backlog caused by system downtime. If Samuels Furnishings hadnt had Keyman Insurance, they would have had to find the extra funds needed for replacement staff. This would have severely affected the companys cash flow, and they may have had to take out an additional loan to finance it. This would have left them short of funds for other areas of the business and if they couldnt afford to meet the payments on the loan the company might have been forced into liquidation.

The amount of coverage available for key person insurance will be dependent upon the financial risk associated with the reason for buying the protection. Typical reasons for buying key person insurance include: key employee insurance, business loan indemnification, funding

buy-sell agreements and executive benefits. In each of these cases, the financial justification requirements are different. The general guidelines for each are described below:

1. Key Person Insurance


Income including bonuses Niche experience of the key person Their contribution to earnings Education and prior work history Background of the company Company revenues, income and net worth

2. Business Loan Indemnification


History of the business Reason for the loan Terms of the loan Collateral Company revenues, income and net worth

3. Funding Buy-Sell Agreements


Ownership percentages Copies of the actual agreement Company valuation Company financial documentation

4. Executive Benefits

Key executives income including bonuses Copy of the plan documents How the benefits were determined Company financial documentation

Regardless of how much insurance is applied for or requested by the business, an insurance company will approve a key man policy based on their interpretation of the true risk exposure. Providing the detailed financial information above allows the insurance company to accurately assess the facts and make the best insurance offer. Please contact MEG at (877) 5833955 to discuss your special circumstances or additional questions on financial underwriting.