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January 21, 2000

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Insuring the key person

Murali Iyer

In any company only a few individuals take the important decisions.The implementation of these decisions down the line makes or breaks the business.

These individuals have specialised knowledge, skills, vision and business acumen. Combined with the ability to take the organisation along, these are the people who bring higher revenues, profits and loyalty.

It is their enterprise and exemplary foresight that takes an organisation to higher planes. Thus, it is only natural that the sudden exit of such individuals (for whatever reasons) will not only cause financial distress but also a loss of goodwill if not permanently, then at least temporarily till such time that a suitable candidate of the same calibre is found, trained and acclimatised to the work culture of the organisation.

Such a sudden exit of the individual can also lead to a shift in the loyalty of customers, market perceptions, etc. Given the current state of the stock markets, such a move can have a disastrous effect on the stock price of a listed company, resulting in an erosion of market capitalisation and shareholder wealth in the blink of an eye.

Such important individuals are also called "Key Men" for their organisations. Thanks to Life Insurance Corporation of India (LIC), a company has an avenue to secure the loyalty of key employees/directors by appropriately insuring them and passing on the benefits to that "Key Man" before the policy matures.

It is a little known insurance policy, but it can cover the largest of enterprises. It hinges on the most important employee(s) of an enterprise, so that a business can be saved from a setback in the event of a premature death of the key man (like Rohinton Aga of Thermax and Vinod Meswani of Reliance), or if he plans to leave the company suddenly (like B V Venkatesh of BFL Software). Imagine the effect on the Infosys--touchwood!--stock if something like this were to happen to N R Narayana Murthy or Nandan Nilekani!

Benefits for the company
Let's look at the financial benefits first. The premium paid by the company is a tax-deductible expense. This policy can be used as either an extra superannuation benefit or an ex-gratia payment to the key employee during the service period. If the company receives the proceeds on maturity, then they are taxable. The company can also raise loans on the policy from LIC at 12 per cent a year.

The employee/director feels cared for, as his life is insured for a large sum that will be paid by LIC to his family if he dies. This ensures loyalty and avoids employee turnover in the decision-making cadres.

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. The directors can also safeguard their immediate family from getting affected by the vagaries of the industry and the various business cycles that a company has to face.

Who is eligible?
There is no bar on having more than one key man in an organisation when it is very large. But, the policy is undertaken subject to the norms and guidelines of LIC. Even a proprietor can be insured. The quantum and terms of the policy would vary depending upon different facts and situations. But in all cases, it cannot be taken on the life of the key man.

How is the "Sum Assured" calculated?
The sum assured depends upon various calculations, including the financial health of the company and the value assigned to the key man. The monetary value of the key man is not only dependent on his current worth to the enterprise (in terms of contribution to revenue and profits, savings, goodwill, future growth etc), but also on the extra expenditure required to be made by the company in training a new person for the same job. Even the current fair value of the future problems of the company, which may be attributable to the Key Man's absence, will be factored into the calculations of the sum assured.

Yet another method to arrive at the figure of the sum assured is to take five to eight times the total salary package. However, the proper justification of the reasonable quantum of sum assured on the key man can be arrived at differently, on a case-to-case basis. There is no general guideline on this particular aspect while calculating sum assured.

To sum up, the Key Man Insurance Policy is a unique and innovative concept of insurance purchased by companies to safeguard themselves against any eventuality concerning their key men. It protects the company from financial loss and goodwill. The justification of sum assured varies from case to case depending upon estimated loss to the company on losing the Key Man. It is open to all categories of companies enterprises, concerns, firms, companies, etc. No advance intimation/approval is necessary from the Income Tax authorities to claim deduction of insurance premium payment. All in all, a sound business decision for any organisation.

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