Keyman insurance policy means a policy under which employer will be regarded as proposer and premium payer & employee is the person whose life is insured under policy against loss due to death, sickness, injury etc. All benefits under the policy shall belong to employer. In other words, employer is the beneficiary & employee is the Keyman.
The employer is entitled to claim premium payment as business expense. However, if the proceeds of Keyman insurance policy are given to family members of the employee, the employer cannot claim deduction of the premium payable by him. No taxability arises related to proceeds received by family members of employee. In case law requires the employer to compensate the employee for loss of injury or death etc. & employer covers such obligation imposed by law under insurance policy, although the premium paid shall be deductible but such policy will not come under the category of Keyman Insurance policy.
Keyman refers to a person possessing special knowledge & skills having substantial responsibilities towards a company by which he is employed. He also contributes towards increasing profits of the company. It could be director, key personnel, Key project manager etc.
- The Keyman insurance policy concept is applicable only when there is employer-employee relationship. If there is a sole proprietorship or partnership, Keyman policy is not applicable as sole proprietor or partner is not an employee. The policy premium in such cases will be treated as private expense & proceeds received at maturity shall not be taxable.
- However, in case of a limited company, if policy is taken in the name of director or in other words director is the Keyman holding significant share i.e. at least 20% share in a company, the premium paid by employer cannot be claimed as deduction as this situation is similar to sole proprietorship & partnership. The payment of premium shall be treated as of capital nature.
Benefits of Keyman insurance policy to company
- The company shall receive the whole money in case of death of Keyman & that money can be used to cover the loss caused by his death.
- The company can also claim deduction of the premium amount as business expense
- The policy can also be used by company for raising loans. Interest on loans taken against such policies can be claimed for deduction as business expense.
- The insurance can also act as motivating factor for employees & reduces labor turnover
- Insurance policy also helps the company in better tax planning
- A company can request the assessing authority, not to treat premium amount as perks in the hand of employee.
Criticisms of Keyman insurance policy
- The maturity amount of policy is taxable in the hands of employer as the company is paying the premium amount. But in case policy premium is paid by Keyman, the maturity amount will be exempted
- However if the policy amount on maturity is transferred to employee, it will be taxable as it will be treated as ‘Profit in lieu of salary’ in the hands of employee.