Keyman Insurance Quiz

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Questions and Answers

What is the primary benefit to the company under Keyman Insurance if the Keyman dies during the policy tenure?

The death benefit is treated as income under the head 'Profits & Gains of Business or Profession'. (correct)

The company pays lower premiums in future years.

The company receives tax exemptions for the death benefit paid.

The company can deduct the full premium amount from its taxable income.

Which scenario illustrates the company's ex-gratia payment after the Keyman's death?

The company makes an ex-gratia payment to the legal heirs in the same financial year. (correct)

The company pays a lower premium amount in the following years.

The company retains the full death benefit to offset future losses.

The company invests the death benefit in new employee training programs.

Under which section of the Income Tax Act is the death benefit from Keyman Insurance treated as income?

Section 28(vi) (correct)

Section 45(1)

Section 37(1)

Section 10(10D)

What is the tax treatment of ex-gratia payments to the legal heirs of a deceased employee?

It is exempt from taxation as per CBDT circular no. 573. (D) Signup and view all the answers

Which business entities are NOT eligible for Keyman Insurance?

Sole proprietorships and Charitable Trusts. (B) Signup and view all the answers

What is one way the company may utilize the death benefit under Scenario 2?

To cover losses incurred due to the death of a Key person. (A) Signup and view all the answers

What happens to TDS at the time of paying the death proceeds?

HDFC Life will deduct TDS at the time of payment. (A) Signup and view all the answers

What is the tax treatment of the maturity benefit if the policy was not assigned before maturity?

Taxable as business income after TDS deduction (D) Signup and view all the answers

How is the death benefit treated for the legal heirs if the policy was assigned?

Taxable as ordinary income from other sources (A) Signup and view all the answers

What is the annual premium amount paid by Mrs. Chandana Seth for her employees?

20 lakhs (C) Signup and view all the answers

What amount is saved in taxes annually by Mrs. Chandana Seth due to the insurance policies?

6.60 lakhs (A) Signup and view all the answers

Which product was NOT mentioned as part of Mrs. Chandana Seth's insurance package under the Employer Employee scheme 2 (EE2)?

Term Insurance (A) Signup and view all the answers

Who holds the ownership of the insurance policy during the lock-in period?

The employer (B) Signup and view all the answers

What happens to the death benefit if the employee passes away during the lock-in period?

Paid to the employer after TDS deduction (C) Signup and view all the answers

What is typically the role of the employer in an employee insurance policy?

To own the insurance policy (C) Signup and view all the answers

What is one possible outcome when the employee survives the lock-in period?

Ownership of the policy transfers to the employee (C) Signup and view all the answers

What is the tax treatment on the death benefit paid to the employer?

Subject to TDS deduction (A) Signup and view all the answers

Which type of insurance is primarily aimed at protecting the interests of the employer?

Keyman Insurance (A) Signup and view all the answers

In partnership insurance, which aspect is typically covered?

Death benefits for key partners (A) Signup and view all the answers

Which benefit is primarily associated with employee insurance?

Survival benefits after lock-in (B) Signup and view all the answers

What is a key consideration for employers when selecting insurance policies for their employees?

The tax implications and benefits (B) Signup and view all the answers

What determines the payout responsibility for death benefits in employer-held insurance policies?

Status of ownership during the lock-in period (A) Signup and view all the answers

Study Notes

Business Insurance Solutions

Focuses on providing financial protection to businesses against losses during normal business operations.
Covers legal liabilities, employee-related risks, and protects organizational interests and key employees.
Includes value-based planning, valuation protection, and profit protection strategies.

Types of Business Insurance

Keyman Insurance: Protects against financial loss due to the death/absence of a crucial senior executive (keyman).
Partnership Insurance: Covers the lives of partners, based on their stakes and partnership agreement.
Employer Employee Insurance: Provides life insurance to employees where the employer has an insurable interest.

Medium, Small, and Micro Enterprises (MSMEs)

Significant contributors to India's GDP, exports, and socio-economic development.
Categorized into Manufacturing and Service firms.
A large and important market for business insurance solutions.
India's FY23 MSMEs totalled 6.3 crore; 30% of India's GDP; 11cr people employed (~40%); 95% of industrial units are MSMEs; FY23-24 budget allocation: ₹22,138 crore (increase by 42%).

Keyman Insurance Details

A senior-level executive whose services are crucial for business success.
Mitigates risks like loss of earnings, specialized skills, recruiting/training costs, asset losses, and potential reduction in creditworthiness due to death or absence.
Compensates businesses for financial losses arising from untimely death or absence of a key person.
Fixed sum assured; does not compensate for actual losses.
Examples include Rakesh Jhunjhunwala, Ambareesh Murthy, and Sanjay Shah.
Covers the lives of employees contributing substantially to the success of the business organization.

Keyman Insurance Working

Business pays premiums.
Insurance company provides death benefits for loss of key person.
Key Person can be an owner, top executive, or an individual instrumental to the business.
Employer pays the premium for employee's insurance.
The benefits/proceeds to the assignee (owner, etc) are from the insurance company.
Conditions: Keyman need not hold the highest position; keyman includes 'key woman'; there can be more than one Keyman in a business.

Keyman Insurance Benefits

Provides a sum assured in case of a claim.
Strengthens the business's working capital and balance sheet.
Businesses can save tax and reinvest the amount in the business.
Helps attract/retain key employees and assure creditors/suppliers.
Protects the family of the keyman from financial losses in case of untimely demise.

Partnership Insurance

Protects the financial interest of a partnership if a partner dies.
The business has an insurable interest in the lives of partners.
Only term insurance policies are taken under partnership insurance.
Insurance cover is only provided if explicitly stated in the partnership deed.

Partnership Insurance Benefits

Hassle-free settlement of claims for the deceased partner's family.
Ensures business continuity.
Protects against disruption on a partner's death.
Funds made available immediately on a partner's death.
Provides confidence to lenders.
Liquid capital to settle accounts with deceased partner's family.
Funds to buy out a deceased partner's share.

Tax Implications in Partnership Insurance

Premiums paid are deductible as business expenses.
Death benefits to the partnership firm are taxable.
In case of policy assignment, death proceeds received by legal heir are taxable from other sources.

Calculation of Sum Assured (SA) in Partnership Insurance

The maximum sum assured is the lower of 10 times the keyman's compensation, 3 times the average gross profit, and 5 times the average net profit in the last three years.
Depreciation is not allowed.
Maximum SA per partner shouldn't exceed capital contributions.
The final eligible sum is divided as per partner's profit-sharing ratio.
Nominations aren't allowed.

Eligibility Criteria and Documentation in Partnership Insurance

Keyman should hold less than 25% shares.
Keyman's total holdings (including family) should be less than 75% of the firm's shares.
Valid proof of the critical role for the proposed life (Keyman) in the business is required.
Cover is provided only up to the Keyman's 65th birthday.
Documents are ITR, capital account statements, Profit & Loss Account Balance Sheet, supplementary questionnaires, and a copy of the partnership deed.
Profitability and business licensing are crucial qualifying criteria.
The firm needs to have made profits for at least three years, or have a consistent turnover.

Employer Employee Insurance

Principle: employers have an insurable interest in their employees.
Includes group and individual insurance.
Companies qualifying for EE schemes are: Proprietorship Firm, Limited Liability Partnership, Public Limited Company, Partnership Firm, Cooperatives Society, Private Limited Company, and Trust.
Specific conditions: lock-in period, policy re-assignment to the designated employee.

Employer Employee Insurance Benefits

Enables employers to retain valued employees, enhance their reputation, optimize tax, and provide financial security for their employees' families.
Enables employees to accumulate wealth and financial security, while experiencing employer appreciation.

Eligibility Criteria for Employer Employee Schemes

Employees must have valid proof of income.
Companies must be profitable and able to justify the total premium payments across all employees.
Companies that haven't been profitable for three consecutive years or whose profitability and turnover are declining are not eligible.
Exceptions are possible in cases of start-up companies.
Notional surrender value at ownership transfer will be treated as salary.
Individual Employee contributions are not factored; the financial viability of the organisation, and employer-employee shareholding relationships are factored.

Calculation of Sum Assured in Employer Employee Insurance

Maximum SA is based on the individual employee's financial viability and shareholding profit, if applicable.

Documentation and Conditions

Required documents for EE schemes may include income tax returns, profit and loss statements, board resolution.
Required documents for LTRP schemes may include the employer's undertaking, board resolution, and declarations from the employee and their complete attestation and re-assignment form.

Products and Products Options under Employer Employee and LTRP

Some products are not allowed under the Employer Employee schemes (full underwriting product variants, Health, and Group products, Immediate income options, Joint Life products, and Children plan). Others are allowed (Savings, ULIP, and Protection products).

Types and Structure of LTRP and EE2

The Employer buys an insurance policy, and the Employee is the life assured.
A lock-in period typically applies.
If the employee survives the lock-in period, the policy will be re-assigned to the employee.
If the employee dies within the lock-in period, death benefits are typically paid to the legal heir, in some cases potentially to the employer.
In certain structures, payouts may be taxable.

Tax Implications in Employer-Employee Schemes

Premiums paid by the employer are deductible as business expenses.
For policy proceeds on surrender, maturity, or death within the lock-in period, the Employer is liable for the tax implications.
On termination of the lock-in period, taxable surrender values are typically treated as salary income in the employee's name.

Pension and Deferred Annuity Products for LTRP

Tax benefits for the company and retirement benefits for employees.
Creation of retirement income through company funds.
Tax-free returns up to 60% of the commutable corpus.

Lock-in Period Details, Rules, and Examples

Employer defines the lock-in period.
Lock-in period is typically prior to vesting date.
Specific plans, such as immediate income plans, require specific lock-in periods prior to the start of payouts.
Companies with products like Sanchay Plus or other variants require specific considerations for lock-in period requirements.

Eligibility Criteria

Employee must have valid income proof.
Company must be profitable and able to justify total premium payments across all employees.
Companies with profit records of three successive years or who have declining turnover are generally ineligible.
Exceptions may exist for start-up companies with legitimate intentions.

Documentation Required in EE Scheme

Income tax returns, profit & loss statements, board resolution
Employer's undertaking, board resolution, and declarations.

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Description

Test your knowledge on Keyman Insurance and its implications for companies. This quiz covers topics such as tax treatment, ex-gratia payments, and eligibility criteria for businesses. Demonstrate your understanding of how Keyman Insurance benefits companies upon the death of a key employee.