One question at the time of Income tax assessment has been asked to me about what is the definition is of Key man Insurance Policy?? And if proposer is a Company and the name of assured person is the Key man of the company only this satisfy the policy to be called Key man Insurance Policy.
Kindly request you to suggest me the same. Only LIC agreement copy is enough or any thing required herewith.
28 July 2024
A **Key Man Insurance Policy** is a type of life insurance taken out by a company on the life of an individual who is considered crucial to the company’s operations and success. This individual is typically a key executive or someone whose loss could have a significant impact on the company's financial health. Here’s how to define and substantiate a Key Man Insurance Policy and what documentation is required:
### Definition of Key Man Insurance Policy
1. **Purpose**: A Key Man Insurance Policy is designed to protect a company against the financial loss that could result from the death or disability of a key employee. This policy provides financial support to the company to cover potential losses, recruitment costs, or business disruption.
2. **Policy Holder**: The company is the policyholder and pays the premiums.
3. **Life Assured**: The individual whose life is insured is the key person whose loss would impact the company's operations.
4. **Beneficiary**: The company is also the beneficiary of the policy. In the event of the insured person's death or disability, the policy pays out to the company.
### Documentation and Validation
**1. Key Man Insurance Policy Documentation:**
- **Policy Agreement**: The insurance policy document itself, which details the coverage, premium payments, and terms of the insurance. - **Certificate of Insurance**: Issued by the insurance company confirming the policy and its details. - **Policy Schedule**: Lists the key details such as the sum assured, term of the policy, and premium payment schedule.
**2. Verification for Tax Purposes:**
- **Proposer and Assured Relationship**: To qualify as a Key Man Insurance Policy, the proposer (the company) must be the policyholder and the assured person must be someone considered key to the company's operations. This needs to be evident from the policy documents and the company's internal records. - **Company’s Documentation**: The company should maintain records explaining why the insured person is considered a key man. This could include organizational charts, business plans, and explanations of the individual’s role and contributions to the company. - **Income Tax Assessment**: During income tax assessments, you might need to provide details about the key man’s role in the company, the rationale behind the policy, and how it benefits the company. This information helps establish that the policy is not just a regular life insurance policy but is specifically designed to mitigate risks related to the loss of a key employee.
**3. Policy Document Variations:**
- **Company vs. Individual Insurance**: While the basic structure of the insurance policy remains similar, there are specific details related to the policyholder and beneficiary that differ. In a Key Man Insurance Policy, the policyholder and beneficiary are the company, whereas, in individual insurance, the policyholder and beneficiary are typically the individual or their family.
- **Company-Specific Policies**: The insurance document for a company might include additional details relevant to business needs, such as coverage for business interruption or financial loss, which may not be present in individual policies.
### Key Considerations:
1. **Policy Agreement**: Ensure that the insurance policy clearly states the policyholder as the company, the assured person as a key employee, and the company as the beneficiary.
2. **Documentation**: Keep a copy of the insurance policy agreement, certificate, and any additional documentation that justifies the key man status of the insured person.
3. **Company Records**: Maintain detailed records about the key person’s role and contributions to justify the policy’s necessity and benefits.
4. **Tax Treatment**: Ensure compliance with tax regulations regarding key man insurance policies. Premiums paid on such policies are generally tax-deductible for the company, and the insurance proceeds are usually tax-free, but tax treatment may vary based on jurisdiction and specific circumstances.
### Conclusion
To classify and validate a policy as a Key Man Insurance Policy:
- **Confirm the Role**: Ensure the assured person is a key employee whose loss would impact the company. - **Provide Documentation**: Submit the insurance policy document, including the agreement and certificate, along with company records explaining the role and necessity of the key person. - **Understand Differences**: Recognize that while the policy structure is similar, the details in company-specific insurance documents will reflect the nature of business and the key man’s role.
Providing comprehensive documentation and clear justification for the key man’s role will help establish the validity of the policy as a Key Man Insurance Policy and ensure smooth handling during income tax assessments.
CAclubindia
