With the tremendous industrial growth and technological development, every organization needs eminent technicians and top level experienced officials. It is an undeniable fact that the success of any business depends much on the competency of the key personnel. On the other hand, loss of a key man, say through premature death, would severely affect the profitability of a concern, at least in the short term. So it would be prudent to cover by means of insurance the financial loss likely to be suffered to the extent of the contribution to the business by the key man. The financial loss could be reduction in profits, loss of business, cost of finding and training a replacement, loss of goodwill and loss of profitability. Hence it is possible to establish an insurable interest in the life of such important personnel employed to the extent of financial loss likely to suffer by the business on the death of a key man and provide an appropriate cover through a life insurance policy. Arranging life insurance on the lives of important employees is known as Key man insurance.
Who is key man?
A key man can be an expert, a technocrat, a director, a shareholder or an executive. Broad guidelines for such a policy are as under: -
- The company should be a profit making one and average turnover tor the preceding three years should be more than Rs.5 crore.
- If the keyman is shareholder, he should have less than 51% shares in the company and he and his family should hold less than 70% shares in the company
- He should be at least a matriculate and less than 50 years age.
- Normally limited premium payment endowment assurance without profit plans are allowed for key man insurance. Other plans of assurance, if allowed, will also be generally without profit.
- Ordinarily, a term of 10 or 15 years is granted but maturity date of the policy would in no case be beyond norman retirement age.