Key Man Insurance

Key man insurance is an insurance taken by a business firm on life of an employee (Keyman) whose services contribute to the success of the business of the firm. The object of keyman insurance is to indemnity a business firm from the loss of earnings resulting from the death of a valuable employee. Loss of earning may occur because immediate replacement of the keyman may not be possible and it may take a longer time to train another person to perform his functions.

The primary objective of the insurance is to protect the company against premature death of valuable employee, the company also secures some tax advantages. It implies that in the period immediately following his death, there will be a vacuum in the company with the result thatthe company incures financial losses or even at times becomes unable to fulfill the commitments made by it.

Keyman Insurance will not be issued on the following cases.
1. Keyman has a share of 51% capital in the firm.
2.His family has a share of more than 70% capital in the firm.
3.the company is incurring losses consistantly
4. The keyman is illitrate.

The following factors would be taken into account while deciding the quantum of keyman insurance.

1.The qualification of the keyman
2.Experience Vis-a-vis exposure in different capacities.
3.His service in the company and previous record.
4.Whether he is the only keyman in the particular area or otherwise, the following method may be used in deciding the sum assured under Keyman Insurance.
For a large quoted Public Limited company, the maximum sum assured will be lower of the following
1)5 Times average net profit (After making provisions for depreciation and income tax.)
2) Two or three times the gross profit (Net profit + Depreciation + Income Tax)