Not many are aware that they can secure the life of their business just as one secures their family by taking life insurance. Through Keyman insurance, your business need not suffer losses when a crucial person leaves.
What is Keyman Insurance?
Keyman insurance is an insurance policy where both the proposer and the premium payer of the policy is the employer. The employer takes up the policy to insure the life of a key employee (Keyman). When there is a claim, the benefit is to the employer. The ‘Keyman’ is often an employee who possesses a special set of skills or has important responsibilities and whose contribution is significant to the organization’s profits.
How It Works
When the ‘Keyman’ ceases to be an employee of an organization if the first employer has the Keyman policy, they are presented with four options:
The employer can cease to pay for the premiums, and as such, the policy will lapse.
The employer may continue to pay the premiums which will enable him/her to recover the proceeds if a claim arises.
The old employer can transfer the policy to the new employer if they have a mutual agreement between them.
The insurer can assign it in favor of the keyman.
To be eligible, the ‘keyman’ should not hold more than 50% of a company’s shares. Two, if the keyman and his/her family hold shares of the company together, they should be under 70%. Three, the employer should provide proof that the keyman plays a critical role in the company.
How much is assured?
The maximum sum that is assured is under 10 times the yearly compensation package of the keyman. Additionally, it is under 3x the company’s average gross profit for the former three years. Finally, it is lower of 5x the company’s average net profit in the former 3 years.
However, this insurance is not issued if the company’s turnover or profit is declining unless in special circumstances.
Insurance Policies That Can Be Bought As Keyman Insurance
Due to recent changes to the rules by IRDAI, only term insurance can be purchased as Keyman insurance. Earlier on, policies under endowment life insurance that had maturity benefits were also on the table.
On term insurance, the policy’s term coincides with the contract period or retirement age of the Keyman. Also, it does not allow for taking loans against the riders or policy.
With Keyman insurance in place, there is a lot of security accorded to employers or owners of companies against losses which is why it is popular.