Insurance
•02 min read
Welcome to our brand-new series, A-Zs of Insurance. In this series, we will venture into the world of insurance to breakdown insurance jargon for you, so you’re empowered to make informed decisions about your financial security.
Are you a startup founder or a business owner? If yes, you must think about protecting the business from any unforeseen circumstances that might cause financial losses, so you can ensure stability as well as growth.
One such contingency can be the unfortunate demise of an important employee, the loss of whom can lead to financial and operational roadblocks. This can be in terms of business continuity, project deadlines, investor expectations, amongst other outcomes.
A strategic risk management tool against this loss is key person insurance. It acts as a financial backbone for your business to mitigate financial vulnerability.
In this article, we will delve into the intricacies of key person insurance and its importance for entrepreneurs like you.
Key person insurance, also known as keyman insurance, financially protects businesses in the event a ‘key person’ of the entity, like a director, project manager, etc., passes away. It ensures the stable continuation of business operations, without hitting any financial speedbumps or delays on the way.
With key person insurance, any business can be confident in the fact that it can seamlessly bounce back to operations, projects, and other responsibilities. If the key employee passes away, the compensation received by the business can be used for these functions or to hire and train new people for the role. The money can also be used to clear debts, pay off investors, and cover any other financial hardship.
The loss of any important employee can lead to a drop in the stock valuation of a business. These financial hiccups can be taken care of with the compensation received by the business.
The business can also decide to handover the payout to the deceased’s family members, so they can have a strong financial backup for their daily needs, future goals, pending debts, and more.
The business can also avail tax benefits under the Income Tax Act, since key person insurance is a business expense.
Key person insurance helps businesses cover any financial setbacks caused by the loss of an important employee.
Here, the employer buys key person insurance to safeguard the business and they’re responsible for premium payments. The lives of the key persons are insured for a predetermined amount. In case of their unfortunate demise, the insurer pays out this amount to the business entity to smoothly carry out affected functions and obligations.
In India, as per the IRDAI, only pure protection plans (i.e. term insurance) can be bought as key person insurance. Also, the policy period of the insurance cover is typically either the specific employee’s retirement date or the last working day on their contract.
Note: The exact terms, conditions, and specifications of key person insurance can vary across plans.
Here are a few reasons why this cover can be quite beneficial to a business:
