Hyderabad, Aug 13: A company‘s most valuable asset is often not its machinery or its balance sheet, but the handful of people who drive it – founders, directors, senior managers or technical experts whose knowledge and leadership keep operations running. When such a person exits suddenly, due to an untimely death, the fallout can be severe: lost revenue, operational disruption, and shaken confidence among customers and creditors.
Business insurance is designed to cushion this risk, and two structures dominate the space – the Employer–Employee Insurance Scheme and the Keyman Insurance Policy.
Employer–Employee Insurance is essentially a retention and welfare tool. The employer buys a policy on an employee or director and pays the premiums, remaining the owner and beneficiary at the outset. The policy may later be assigned to the employee, who then becomes entitled to its benefits. Beyond protection, it doubles as a long-term wealth-creation instrument — effectively a retirement corpus built through the company rather than a one-time bonus. Premiums may be claimed as a business expense under Section 37(1) of the Income Tax Act, allowing firms to defer tax while building the benefit, though the eventual tax treatment on maturity or death depends on ownership and assignment status at that time.
Keyman Insurance, by contrast, protects the company itself, not the employee. Here, the company is proposer, owner, premium-payer and beneficiary, while the policy is taken on a person whose absence would hurt revenue, client relationships or creditor confidence. Should the key person die during the policy term, the claim – treated as business income under Section 28- gives the company working capital to recruit and train a replacement, service liabilities, and reassure stakeholders while it steadies itself. But if company decides to transfer the claim amount received from the Insurance company to the legal heirs, within the financial year then the amount becomes ex gratia. Ex gratia is a tax-free income as per the CBDT circular 573.
Cover under a Keyman policy is typically calculated as the lowest of three benchmarks: five times average net profit, three times average gross profit, or ten times the individual’s annual compensation.
Eligibility spans private and public limited companies, trust, partnerships, LLPs and sole proprietorships, though insurers generally expect two to three years of profitable operations before underwriting such policies.
Industry professionals note that these products work best as part of a broader financial-planning framework – supporting succession planning, retention, emergency liquidity and tax efficiency together, rather than being treated purely as death-risk cover. Documentation matters: board resolutions, salary records, and profit statements are typically required to establish genuine business purpose.
Given the complexity of tax treatment – which varies by ownership structure, assignment status and the nature of the payout – businesses are advised to consult a chartered accountant and a licensed insurance professional before purchasing or assigning any such policy.