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March 7, 2000

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Keyman Insurance

Murali Iyer

In any company only a few individuals make the important decisions. The implementation of these decisions down the line makes or breaks the business.
Thanks to their specialised knowledge, skills, vision and business acumen, these are the people who bring higher revenues, profits and loyalty. 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.

A sudden exit of the individual can also lead to a shift in the loyalty of customers and market perceptions. It could also 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.
Though a rather unknown insurance policy, 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 to the company

  • The premium paid by the company is a tax-deductible expense.
  • No advance intimation/approval is necessary from the Income Tax authorities to claim deduction of insurance premium payment.
  • 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 per annum.
  • The fact that the employee/director's 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.
  • 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?
    It is open to all categories of companies - enterprises, concerns, firms, companies, partnerships, proprietorships. Moreover, there is no bar on having more than one key man in a large organization. But, the policy is undertaken subject to the norms and guidelines of LIC. 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.

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