Keyman Insurance Quiz

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.