Key Person Insurance

Concept

• In every Organization there are a Few Key Persons who Run the Show.

• They are the Pillars of the company.

• Any unfortunate event such as a Sudden Death of a Key Personnel may result in Temporary set back to the company.

• Every Organization requires Protection against Financial Loss such as liability, Recruitment Cost, Training Cost etc., if such event takes place.

Key man insurance is also known as Business Continuity Plan

Who is a Key Man ?

• An Employee or a Director in a Key Position , whose services have significant effect on the Profitability of the company due to his Technical background, Experience in the field, Industry wide Vision or Market Image.

• Whose Permanent Absence or

(death) will Affect the smooth running of the company.

There can be more than one Key Man within an Organization

Why Key Person Insurance ?Sudden Death of a Key Person Creates a Vacuum in an Organization as it can Affect in Many Ways :

• Business Sales

• Business Momentum

• Liability of company

• Goodwill

• Credit of company

• Cause Delay or Halt in New Project

• Added Cost & Time in grooming new Key Person

Key Man Insurance is The Solution !

Face Value of Key Person

Factors which Determines The Face Value :

• Investment that the company will require to develop a New Key Person

• Contribution of a Key Person to Profitability of Organization

• The Loss , the Company is Likely to Suffer in Case of Sudden Death of Key Person .

How To Determine The Face

Value ?Method I : Three Times of Average Gross Profit of

the Company for Last 3 yrs .

Method II : Five Times of Average Net Profit of the Company for Last 3 yrs .

Method III : Ten Times of Annual Compensation Including Salary , Bonus & All Other Perquisites.

Least of the Amount Derived from above Methods will be allowable Sum Assured for Key Person of The Company .

For More than One Persons , the Overall Limits Derived by Above Methods I & II Should Not be Increased.

Benefits To The Organization

TAX BENEFITS

Premium paid by the Company for Key Person Insurance policy would be Allowable as Deduction u/s 37( I ) of Income Tax Act , 1961.

( Refer : CBDT Circular No 762 Dt. 18/2/98 )

Premium paid by the Firm will not be Treated as a “ Perquisite “ in the hands of Key Person under Para ( V ) of the Section 17( 2 ) of Income Tax Act , 1961, Since the Key Person does not Derive any Benefit from the Insurance on His Life.

Advantage of Key Person

Insurance• It May be Used as an Instrument

for Tax Planning as it gives Substantial Income Tax Savings To The Organization.

• No Advance Intimation Or The Approval is Required from Tax Authority To Claim Deduction of Insurance Premium.

• It Keeps the Company Position Stabilized in The Market.

• The Competition May Not Take Advantage of the Situation Caused by Unfortunate Death of the Key Person .

Requirements

Medical Requirement

Depends on Age & Total Face Value .

Financial Requirement

Company would always be proposer

Copy of Memorandum & Articles of Association

Board Resolution

Key Person Questionnaire Form duly signed by

Authorized signatory

Individual Tax Returns of Key Person

Restrictions

• Only Term Plan Allowed in Key Man Insurance

• Riders Not Allowed

• If Proprietor/Partner Key Man Not Allowed

• Term of Cover Should Not Exceed The Retirement or Superannuation Age .

Latin Manharlal Securities Pvt. Ltd.Viraj, 6th Floor, 124, S.V. Road, Above HDFC Bank , Khar (w), Mumbai-

400 052.

www.latinmanharlal.com Contact : 022- 40350101/ 40350187