Keyman insurance is an excellent financial recourse for businesses, especially when they lose out a key roleperson. It has several advantages including lowered taxable income, easier availability of required funds and even improving the morale of your keypad. A ‘keyman’ is someone who works in a key role for a business and provides key input as regards the day-to-day running of that business.
So what exactly is a keyman insurance policy? Well, it is an indemnity or a policy issued by the insurance company to the insured that pays the amount of the claim when the key employee dies or is made permanently disabled. The policy will also pay the amount of the claim even if the key employee is totally unharmed and does not lose any abilities. In addition to this, the policy will also pay the amount of premiums paid by the employee. Key man insurance policy is usually offered by the employers.
In case of a death, the policy will pay the named beneficiary the amount of the claim plus a predefined percentage of the net proceeds. Besides this, the policy will also pay the named beneficiaries a certain percentage of the death benefit received if the insured dies during the period fixed by the keyman insurance policy. The two major features that distinguish this type of policy from others are the death benefit received and the tax liability element. A death benefit received by an employee is considered as a refund while a policy pays the same amount even if the insured dies during the grace period. Thus, the insured’s death benefits are passed on to the beneficiary, while the premium paid by the employer remains unaffected.
While considering the keyman insurance policy, one must consider the key man’s policy of life. This will determine the tax implications of the policy. It is possible to reduce the tax implications through these three sections:
First, income-tax. The tax consequences will be different for different people with different incomes. Under the normal circumstances, a keyman insurance policy taken by an employee will be subject to income-tax. The rate of tax will be based on the person’s salary or wage. The higher the wage, the higher will be the tax liability.
Second, the key person’s earnings. The key person in this type of insurance plan is the person who has taken the policy. The amount of premium paid and the number of years of service will be used to determine the annual premium payable. Usually, the longer the period of service, the higher will be the annual premium.
Lastly, there is the proceeds from the policy. The proceeds are accumulated by the employer and used to satisfy the policy. There is no provision for the employee to retain any portion of the proceeds. If the employee does not surrender value, his entitlement to the proceeds will be forfeited.
The above description of the keyman insurance policy provides a general description only. The tax implications will vary depending upon the employee’s age, number of years of service and the amount of premiums paid. It is also important to state that the premium and the surrender value have a bearing upon the overall effectiveness of the plan. The higher premiums paid will result in less money left over for the other expenses. In order to maximize the effectiveness of the plan, it is important to carefully consider all aspects before taking the plan.
For every business, there are different keyman insurance plans available in order to address the needs of the organization. Considering various factors like the location of the business, type of business etc. are very important while selecting the policy. In general, every business should have an insurance plan so that they can provide their employees with all the essential services.
If there is any provision for a death benefit, it is very essential to ensure that it is equal to the amount that the key employees would get under the keyman insurance policy. Since the death benefit serves as a last pay-off, the company would not receive any extra money if the key workers die. In addition, there should be a provision for the company to make up the difference if the insured employee retires after the policy has been terminated.
Every key employee in a company should be insured to make sure that in case of any eventuality, they are compensated for the financial loss that they have incurred. If a company does not have a keyman insurance policy, it would be very difficult to compensate the key employees for the financial loss that they have incurred. Thus, it is advisable to buy a keyman insurance cover for every key employee in your company to ensure their financial safety.