The insurance industry offers two similar yet different policies – Employer-employee insurance and keyman insurance. In this article, we will look at which category of policy is suitable for your corporate or entrepreneur clients.
Let us talk about keyman insurance first.
Keyman insurance
Keyman is an insurance policy where both proposer and premium payer is an employer. Here, life to be insured is that of an employee and benefit, in case of a claim, goes to an employer.
Businesses do not run themselves. They need experienced and skilled individuals to plan, execute and implement business decisions so that the business can grow. In such cases, if the key employee who is responsible for the growth of business dies, the business faces substantial loss. The business loses technical knowhow and skill of the employee, which helped its growth. To cover this loss suffered by the business, keyman insurance policy is available.
Only term insurance plans can be bought under keyman insurance. The term of the policy is such that the policy expires when the employee retires. If an employee dies during the term of the policy, insurers pay death benefit to the employer.
Eligibility criteria for the employee to be covered:
- The employee holds less than 51% of the stake in the company in which he/she is employed
- The aggregate shares held by the employee and his/her family members should not be more than 70% of the total share capital of the company
- The role of the employee should be critical for the business
The coverage amount for keyman insurance policy is lower of the following:
- 10 times the annual package of the employee
- 3 times the average gross profit that the company has earned in the last three years
- 5 times the average net profit that the company has earned in the last five years
Tax implications for the employer:
- Premium paid for buying a keyman insurance policy is business expense. This expense is allowed to be deducted from the taxable profits of the company under Section 37 (1) of the Income Tax Act
- Death benefits received will be fully taxable for company. The benefit is considered to be an income in the hands of the company and it is taxed as per the company’s tax slab rates
Tax implication for employees
- There will be no tax benefits to employees
Advantages
- In case of death of a keyman, the company gets monetary compensation
- Company buying keyman insurance can claim a deduction for premium paid as business expense
Drawback
- Since death benefit is taxable, the employer has to pay considerable amount of tax. This reduces the effective benefit received by the company for the loss of its employee
- Only term insurance plans are available under keyman insurance
Employer-Employee Insurance
In employer-employee insurance, a company buys insurance but the beneficiary is an employee. It is a benefit given by a company to select employees to attract and retain talent. The employer-employee insurance policy works as a reward program for employees.
Companies can buy any policy under employer-employee insurance and death benefit attached to any policy will be paid to a nominee of an employee.
Benefits of the policy to the employer:
- Employer can gain loyalty of employees and retain talent
- Checks employee attrition
- Employer can enjoy tax rebates on the premium paid
Benefits of the policy to the employees:
- This group insurance provides security to employees against illness, accident, disablement and death
- In an event of an unfortunate death of employee, his family receives the claim
- Employee may get benefits at maturity as lumpsum if any
Where is the employer employee insurance applicable?
This group insurance policy is applicable when there is a relationship maintained between an employer and his employee as the employee earns the salary for his service provided to the employer.
- Sole proprietorship: Where the employee works (apart from the proprietor);
- Partnership firms: Employees of the partnership firm other than the partner himself;
- Corporate employees
- Legal entity
Who can be covered under employer-employee scheme?
A sole proprietor or a corporate or any other legal firm with minimum five employees can buy this policy. One single cheque has to be drawn by the employer for all the employees he wants to cover. Indian employees who are on payroll of the company are eligible for the employer-employee insurance policy. NRI employees can also apply for the policy provided employer has a registered office in India. The employee should be more than 18 and less than 60 to be eligible for the policy.
Deepak Jaggi is Co-founder and Managing Director at Satco Wealth Managers. He can be reached on deepak.jaggi@satcowealth.com.
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
