Keyman Insurance requirements

Deciding methods – Income Tax Rules

Thank you for reading this post, don't forget to subscribe!

The S.A. under key man insurance can be decided by using the following methods:

The maximum Sum Assured for key man insurance is restricted to :-
10 times of the key man’s compensation package (total salary + annual bonuses of a regular nature and paid a fixed percentage of salary + various other perquisites such as furnished houses, utility bills, cars and commission out of net profit) The notional value of perquisites is taken as 30% of the gross annual salary.
Method of gross profit: the time of the average gross profit (profit before depreciation) of three years.
Method of net profit: 5 times the average net profit (profit after allowing depreciation & taxation) of the last 3 years. On the basis of the above-mentioned methods, we can decide the minimum sum assured (S.A.) for key man insurance.
Note: No key man insurance (KMI) can be issued in case the company’s profits or turnover are declining, unless there are very special circumstance.
Max. S. A. in case of private Ltd. Companies or closely held public limited companies:
- (i) no. of shareholders or employees: 10 or more
- (ii) The maximum Sum Assured: to be treated at par with public limited companies
- (iii) no. of shareholders/employees—more than 5 but less than 10
- (iv) The maximum Sum Assured: 3 times the last 3 yrs average net profit (before tax)
The maximum sum assured under KMI for the recently established companies in the case of audited profit & loss accounts is present.

Key man insurance to employee of partnership firms:-

Max allowable KMI cover to partnership firms
- 3 times of average gross profit of 3 year. Or
- 5 times of average net profit of 3 year, whichever is lower.
The max. amount of cover will be distributed among the key partners.
Key Man Insurance can be given on the lives of more then one partner.

Requirements to allow KMI to the employees firms/proprietary firms:-

Duly filled key man questionnaire
key man’s salary proof. Copy of the employment/individual I T R/from no.16 for last 3 years
audited account of the firms for last 3 years.
Firm’s resolution to take K M I containing the name of the key-employees, amount of cover. Plan & term. Authorized person on the letter head of the firm, duly signed by the authorized person with stamp.
Consent for assignment/surrender max. allowed KMI will be restricted to 10 times the salary of the financial year, as shown in form no.16.
K M I is allowed only on the lives of active partners according to the following conditions:
- average turnover for preceding 3 years should be more than 5 Crores.
- Max S.A. is restricted to share capital of key man + last 3 years total net profit (Good will)

Requirements for ‘Key Man Insurance:

A proposal form signed by the authorized person of the company with the stamp of his designation below his signature.
Duly filled special questionnaire.
Certified copy of board resolution with
consent to buy key-man insurance policy.
giving authority to an individual to act for and on behalf of the company.
Sum Assured
plan/term.
M H R in specified form by marketing manager/sales manager.
Three year copies of audited balance sheets and P&L accounts.
Necessary medical report from the medical examiner.
Three year copies of I.T. returns of the company.
Form to be filled by the key man.

Income tax rules :-

In case of .S.B. is payable under the plans, will be considered as the business income of the company & will be taxable under section 28 (vi) of the Income Tax ACT.
Under section 31(1) of the income tax Act the premium paid under key man insurance can be claimed by corporate entities as bona fide business expenses.
If the policy has been assigned to the key man, the policy-proceeds, including bonuses, will be taken as profit under section 17 (clause) of the income tax Act.
If the director of the company is the assignee under the key man policy, it will be taken as ‘income from other sources’ and will be taxable according to the section 56 (2ic) of the income tax Act.