KEYMAN INSURANCE

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 persons 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.

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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.

Origin of Life Insurance

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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.

OBJECTIVE OF LIFE INSURANCE

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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.

Important Milestones in the Indian Life Insurance Business

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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.

The Insurance Regulatory and Development Authority (IRDA)

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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.

FUNDAMENTAL PRINCIPLES OF LIFE INSURANCE

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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.
3.

Principle of Insurable Interest

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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.

TYPES OF LIFE INSURANCE

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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. Lets

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see what each of these is about, so that you can consider the one that best suits.

T Y P E S E

TERM INSURANCE

ENDOWMENT INSURANCE

WHOLE LIFE INSURANCE

MONEY BACK PLAN

ULIP

PENSION PLAN

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T Y P E S E
1.

TERM INSURANCE

ENDOWMENT INSURANCE

WHOLE LIFE INSURANCE

MONEY BACK PLAN

ULIP

PENSION PLAN

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

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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.
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

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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.
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.

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KEYMAN INSURANCE 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.

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.

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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. 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.

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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 Organizations 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. 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 employees 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. 2. The premiums must be paid on the life of an employee. 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).
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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) (b) The age of the employee at the date the insurance is effected. The expectancy of life of the employee having regard to his family history.

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

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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 employees 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 highlyinnovative research scientist.

OBJECTIVE
The object of key man 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 expertise skill, knowledge, entrepreneurial vision of its Key Director or Key Employee, particularly in this competitive Globalised marketing Environment. Todays companys 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 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.

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Purpose of Keyman Cover

It provides a financial cushion to the company for:

The loss of customers or sales affected by the keymans 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.

Uses for Key Man Insurance

1. 2. 3. 4. 5. 6. 7.
8.

Providing funds for recruiting and training a replacement key employee. Paying any expenses or bills while the company stabilizes. Securing loans for business growth and expansion. Strengthening the companys credit position. Purchasing stock from the deceased owners estate. Offering salary continuation arrangements to the spouse of the deceased. Funding executive compensation plans. Transitioning company ownership to its successors.

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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.

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FACTORS THAT MAKE A KEYMAN

SKILL & KNOWLEDGE

FACTORS

SOURCES OF BUSINESS

SOURCES OF FIRM CREDIT

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 firms affairs which could be acquired by successor only after considerable time.

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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 keymans death.

Sources of firm Credit:

In many businesses, someone is the chief sources and the strength of the firms 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.

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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.

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The fact that the employee/directors 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 companys request is accepted by the assessing authority.

Keyman Insurance policy is a positive measure to improve the retention of the

keyman in the company.

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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 companys 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.
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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.

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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.

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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 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: 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.

ELIGIBILITY FOR KEYMAN INSURANCE

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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 KEYMANS 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 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

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Maturity Age: 75 years 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 directors 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.

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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.

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2.

Key Man Disability Insurance

Key Man disability policies are not readily available with traditional disability providers so income unlike insurance 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 companys 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

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with hiring and training a capable replacement and the key persons contribution to the companys earnings. Financial documentation to support the need for Key Man disability insurance will be required for every case.

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

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Payment and Document Step 1. Interview: Remittance

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.

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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

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forwarded to you on the day of receipt. The policy requirements will be included in the information that is sent with your policy.

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.

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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 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 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.

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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.

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.

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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 1 st 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.

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POLICES AVAILABLE UNDER KEYMAN INSURANCE IN LIC

LICs 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 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 expertise skill, knowledge, entrepreneurial vision of its Key Director or Key Employee, particularly in this competitive Globalised marketing Environment. Todays companys 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 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.

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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 companys 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 companys 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

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under Housing loan by L.I.C. for making provision of Housing facility by the company for its Employee/Directors.

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.

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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, halfyearly 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
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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.

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.

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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. 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.

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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 Standard Enhanced (Term-5) x Annual Premium (Term) x Annual Premium (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.

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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.

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. 2. 3. 4. 5. 6. Critical Illness Rider (Accelerated) Major Surgical Assistance Rider Accident and Disability Benefit Rider Accident Benefit Cover Income Benefit Rider 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.

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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. 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

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R I I D E R S

Critical Illness Rider (Accelerated)

Major Surgical Assistance Rider

Accident and Disability Benefit Rider

Accident Benefit Cover

Income Benefit Rider

Waiver of Premium Rider

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.

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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.
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

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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.

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

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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.

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

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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.

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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

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accident in 1998. He failed to disclose that he had consulted a clinical neuropsychologist 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 cooperative 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;

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2. Was the insurer entitled to cancel the contract on the grounds of nondisclosure?

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 insureds 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.

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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.

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