Keyman & employer-employee insurance

Insurance that protects the business, not the family

Every life policy discussed so far pays a family. Keyman insurance is different: the company is the proposer, the company pays the premium and the company receives the proceeds. The person insured is a beneficiary of nothing. That single structural fact changes the purpose, the underwriting and — most importantly — the tax treatment.

The case for it is straightforward. In most Indian owner-managed businesses, a small number of people carry a disproportionate share of what makes the company work: the founder whose judgement drives every major decision, the technical head who is the only person who fully understands the process, the director whose personal relationships hold the top three clients, the partner whose personal guarantee underpins the borrowing. If one of them dies suddenly, the business does not simply lose a person. It loses revenue, bargaining position and, often, the confidence of its lenders.

Replacing a genuinely key person takes months of search and more months of handover. Keyman insurance funds that gap.

The tax position, stated carefully

This is the part most commonly got wrong, and the errors are expensive.

Premium. Keyman premium is generally claimed as a deductible business expense under Section 37(1), on the basis that it is expenditure laid out wholly and exclusively for the purposes of the business. The deduction depends on the policy genuinely being a keyman policy — taken by the business, on the life of a person connected to its profits, with the business as beneficiary.

Proceeds. They are taxable. Section 10(10D), which exempts ordinary life insurance proceeds, expressly excludes sums received under a keyman insurance policy. Claim proceeds are chargeable as business income. Companies that budgeted on receiving a tax-free lump sum discover this at the worst possible moment, so model the after-tax figure when you set the sum assured.

Assignment. Where a keyman policy is later assigned to the individual insured — a common exit route when a founder retires — the treatment has been contested repeatedly before the tribunals and courts, and the outcomes have turned on the specific facts and the timing. Do not structure an assignment on the basis of a product brochure or a general article, this one included. Get it examined by your chartered accountant before anything is signed.

Employer-employee schemes

An employer-employee arrangement runs the other way. The company takes a life policy on an employee's life, pays the premium as part of that person's remuneration package, and assigns the policy to the employee at an agreed point — often after a vesting period designed to aid retention.

Used genuinely, it is a real benefit. A senior employee receives substantial personal life cover, funded by the company, that they would struggle to arrange on the same terms themselves, and it vests only if they stay. For firms competing for scarce senior talent it is a differentiated offer that costs less than the equivalent in cash.

The tax logic follows from treating the premium as remuneration:

• The premium is taxable as a perquisite in the employee's hands, because it is a benefit provided by the employer.
• The employer claims it as a salary cost, allowable in the ordinary way as employee remuneration.
• Because the policy is the employee's own life policy once assigned, the maturity or death proceeds follow the ordinary Section 10(10D) treatment applicable to personal life policies, subject to that section's conditions.

Where employer-employee schemes attract scrutiny

This structure has a reputation, and it is worth being candid about why. It has been marketed at times as a way to move money out of a closely held company at favourable rates, particularly where the insured employee is a promoter or a promoter's relative drawing a nominal salary. Assessing officers have challenged such arrangements, and the decisions have gone both ways depending on the facts.

The features that make an arrangement defensible are ordinary and documentable:

• A board resolution approving the scheme and the class of employees it covers, passed before the policies are taken.
• The benefit recorded in the employment contract or appointment letter as part of the remuneration package.
• Premium reflected in the salary structure and offered to tax as a perquisite, with TDS deducted.
• A scheme, not a one-off — covering a defined class of senior employees rather than a single promoter.
• A premium that is proportionate to the employee's total remuneration. A nominal salary with an enormous policy is the pattern that draws attention.

If your proposed arrangement fails several of those tests, the honest answer is that it is being used for something other than employee benefit, and it should be examined by your chartered accountant and, if the amounts are material, by counsel before you proceed.

How Rytvae helps

We help business owners establish whether a keyman case genuinely exists, size it against the commercial exposure rather than an arbitrary figure, and place it through our IRDAI-regulated partners. On employer-employee schemes we will tell you plainly whether what you are contemplating is a benefit scheme or a tax structure, and we will ask you to involve your chartered accountant before anything is issued. See the full corporate insurance guide for how these sit alongside group cover.

Frequently asked questions