KEYMAN INSURANCE:
DEFINITION, COVERAGE, BENEFITS, COST, ELIGIBILITY, CLAIMS

A Keyman Insurance Policy, also known as Key Person Insurance, is an Insurance Policy taken out by a business to compensate the financial losses that would arise from the Death of the key person of the business. The Policy compensates the Company against financial losses and reduction in earning capacity suffered by the Company on account of the demise of the Keyman. The company receives the Sum Assured in case of the death of the Keyman during the Policy Term. The Premium for the Keyman Insurance Policy is paid by the Company itself. The Company is the nominee and the Keyman is the Life Assured in a Keyman Insurance Policy.

HOW DOES A KEYMAN INSURANCE POLICY WORK?

A Keyman Insurance Policy is a Term Insurance Policy purchase by a Company to secure the life of its Keyman. The Company pays the premium for the Keyman Insurance Policy and the Keyman (Key person) is the Life Assured under the Policy while the Company is the beneficiary/nominee under the Policy.

The Claim Process under a Keyman Insurance Policy is the same as under a regular Term Life Insurance Policy. The Company receives the Sum Assured in case of the death of the Keyman by submitting the requisite documents.

WHO IS A KEYMAN OR A KEY PERSON?

A Key Man is the major driving force behind a business and has unique skillsets which are invaluable and indispensable for the company’s progress and who contributes significantly to company profits. Loss of such a keyman would cause financial strain on the company or a decline in the company’s earning capacity.

To secure the company from the loss of a Keyman, the company can purchase a Keyman Insurance Policy for such employees. Usually, Companies opt for a Keyman Insurance Policy for Directors, Key Salespeople, People with Specialised Technical Skills or Key Project Managers. There can be multiple Keyman in the company and the company can avail itself of a Keyman Insurance Policy for all of them.

WHAT IS THE ELIGIBILITY CRITERIA FOR A PERSON TO BE CONSIDERED A KEYMAN FOR THE COMPANY?

To be considered a Keyman for a company under a Keyman Insurance policy, a person generally needs to meet the following eligibility criteria:

The individual should hold less than 51% of the company's shares.
The combined shareholding of the Keyman and their family must not exceed 70% of the company’s total share capital.
There must be evidence that the employee plays a critical role in the company’s operations, such as contributing significantly to its financial success, expertise, or leadership.

These criteria ensure the policy is used for genuine business protection rather than personal benefit.

If the employee holds more than 51% stake or the company or the aggregate shareholding of the Keyman and his/her family members exceeds 70%, the eligibility of the cover will be worked out on the basis of Individual Income Proof

WHAT ARE THE BENEFITS OF A KEYMAN INSURANCE POLICY?

The Benefits of a Keyman Insurance Policy are as follows:

Business Continuity: A Keyman Insurance Policy helps a business to recover from financial losses by making funds available in case of the untimely demise of the Keyman.
Find Replacement for Keyman: The proceeds from the Keyman Insurance Policy helps the company to recruit and train the replacements of the Keyman.
Builds Investor Confidence: A Keyman Insurance Policy provides confidence to the Investors that the Company can survive the loss of its Key People.
Liability Management: If the Keyman has availed loans, the death of the Keyman may adversely affect the credit standing of the business. A Keyman Insurance Policy can ensure loan repayment in such a case
Tax Benefits: The Premiums paid for the Keyman Insurance Policy are a tax-deductible expense for the Company paying the Premium.

WHAT ARE THE TAX BENEFITS OF A KEYMAN INSURANCE POLICY?

The Tax Benefits for the Company under a Keyman Insurance Policy are as follows:

Tax Benefit on Premiums Paid: Premiums Paid by the Company for a Keyman Insurance Policy are a tax-deductible expense. This lowers taxable profit for the company and lowers the tax outgo.
Tax Benefit on Death Benefit Received: The Death Benefit received by the Company on the employee’s demise is fully taxable at the existing tax rates.

In case the employee leaves the job, the employer might assign the policy to the employee. In that case, the employee specifies a nominee to receive the death benefit. The Death Benefir received would be added to the employee’s income and taxed at the tax slab rates applicable to the employee.

WHAT ARE THE ELIGIBILITY REQUIREMENTS TO PURCHASE A KEYMAN INSURANCE POLICY?

The main requirement to purchase a Keyman Insurance Policy is that the Company should have been profitable for the last 3 consecutive years.

Keyman Insurance is not issued if a company is making losses or if a company’s profit is declining since the Sum Assured it dependent on the quantum of profits that the company is making. Also, the company would need to submit some proof of the key responsibilities handled by the employee in the company.

WHAT IS THE DURATION OF A KEYMAN INSURANCE POLICY?

A Keyman Insurance Policy is granted upto the retirement age of the employee. So, if the retirement age of the employee is 60 years, the Policy Duration will be 20 years for a 40-year-old employee.

The duration of a Keyman Insurance Policy in Hong Kong typically aligns with the period of the insured employee's usefulness to the employer, often structured as a term life insurance policy. This means the policy coverage generally does not extend beyond the employee’s active employment period with the company. The specific term can vary, commonly ranging from 1 year to 30 years, depending on the agreement between the employer and the insurance provider, and it may be renewable or set for a fixed duration.

WHAT IS THE APPROPRIATE SUM INSURED FOR A KEYMAN INSURANCE POLICY?

The Sum Assured for a Keyman Insurance Policy is based on the below mentioned criteria:

The Sum Assured will not exceed 10 to 15 times the annual compensation package of the Keyman, which includes Salary, Bonuses, and all other Perquisites.
The Sum Assured will be lower than 3 times the average Gross Profit of the Company for the last 3 Calendar Years
The Sum Assured will not exceed 5 times the Company’s average Net Profit for the last 3 years.

The lowest amount computed based on the above 3 methods will be the permissible Sum Assured for Keyman Insurance Policy. Also, if there is more than one Keyman in the company, the above amount is pro-rated in the ratio of that particular Keyman’s compensation to the total compensation of all the Keymen in the Company. Various Insurance Companies have different criteria to decide the Sum Assured for a Keyman Insurance Policy.

What is the Cost of a Keyman Insurance Policy?

The Cost of a Keyman Insurance Policy depends on the following factors:

Age of the Keyman: The age of the Keyman is the primary factor which influences the Premium of a Keyman Insurance Policy.
Sum Assured: The Sum Assured of the Keyman Insurance Policy is another factor which impacts the Premium of a Keyman Insurance Policy. Policies with a higher Sum Assured will have higher Premiums
Policy Term: The Policy Term also impacts the Premium of a Keyman Insurance Policy. Policies with a higher Duration/Term will have higher Premiums.

What is the difference between a Term Life Insurance Policy and Keyman Insurance Policy?

The main difference between a Keyman Insurance Policy and Term Life Insurance Policy is that the Beneficiary in a Keyman Insurance Policy is the Company while the Beneficiary in a Term Life Insurance Policy is the an Individual Nominee, which is usually the family member.

Another difference between a Term Life Insurance Policy and Keyman Insurance Policy is that the Company pays the Premium for the Keyman Insurance while an Individual pays the Premium for a Term Life Insurance Policy.

What are the documents required to purchase a Keyman Insurance Policy?

Purchasing a Keyman Insurance Policy (also known as Key Person Insurance) in Hong Kong involves a process similar to applying for individual life insurance, but with an emphasis on the business's needs and the key person's role. The exact requirements can vary by insurer. Typically, the application is submitted through a bank, broker, or direct to the insurer, and may require underwriting approval, including medical assessments for the key person.Based on standard practices from Hong Kong insurers and brokers, here is a list of commonly required documents:

Duly Filled and Signed Proposal Form with the Company as the Proposer
Keyman Questionnaire signed by the Authorised Person of the Company
Medical Report of the Keyman
Tax returns of the Keyman for the last 3 years
Copies of the Memorandum and Articles of Association of the Company
A Board Resolution stating the Keyman’s name and the Sum Assured required on the Keyman’s Life. The Board Resolution should be signed by the Company’s Authorised Signatory
Duly Certified Copies of the Audited Accounts, Profit and Loss Statements and Balance Sheet of the Company for the last 3 years

What is the importance of a Keyman Insurance Policy?

In today’s times, employees are one of the most valuable assets of the firm. Some employees with rare skills, knowledge and technical skills are critical to the success of the company. The death of a Keyman could result in the company suffering numerous losses as listed below:

Loss of customers or sales attracted by the Keyman’s ability
Loss of Keyman’s special skills and abilities
Additional Cost of finding and training a suitable replacement
Delay or Cancellation of future expansion projects
Recall of Loans guaranteed by the Keyman
Reduction in Credit Rating of the Company

Hence, it is extremely important for the company to secure itself by insuring the life of their key employees in case of their untimely deaths with a Keyman Insurance Policy. The Policy helps a business to recover from financial losses and make funds available in case of the untimely demise of the Keyman. The proceeds from the Keyman Insurance Policy also helps the company to recruit and train the replacements of the Keyman.

What is the Claims Process under a Keyman Insurance Policy?

The claims process for a Keyman Insurance Policy (also known as Key Person Insurance) in Hong Kong follows standard life insurance procedures but is initiated by the policy-owning company upon the occurrence of a covered event, such as the death, terminal illness (life expectancy less than 12 months), critical illness, or permanent disability of the insured key person.

Since the company is the beneficiary and policy owner, it handles the claim to receive the lump-sum payout, which helps cover business losses like recruitment costs or revenue shortfalls. The process typically takes 4-8 weeks, depending on documentation and verification, and is managed by the insurer. Based on practices from Hong Kong insurers and brokers, here is a step-by-step overview of the claims process:

Notification of Claim
Obtain and Complete Claim Forms, Gather Supporting Documents
Submit the ClaimLodge the complete package with the insurer for review
Assessment and VerificationThe insurer reviews documents, may investigate
Payout and ClosureIf approved, the lump-sum benefit is paid directly to the company; if denied, appeal options are provided.

Important Considerations while filing a Claim under Keyman Insurance Policy

The Company should take care of the following points while filing a Claim under Keyman Insurance Policy

Timely Intimation and Document Submission: It is necessary that the Insurance Company is informed of the death of the Life Assured as soon as possible. Additionally, make sure that all the requisite documents are submitted on time to the Insurance Company.
Claim Rejection: If the Claim is rejected, the Company can appeal the decision and provide additional documentation or clarification if available.

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