Keyman insurance
Also written Keyman Insurance policy
A life insurance policy a company buys on the life of a key executive, paying the premiums and taking the benefit itself — and the one life policy whose proceeds are not exempt under section 10(10D).
In plain language
Most life insurance is bought by a person to protect a family. Keyman insurance is bought by a company to protect itself.
The workbook's definition is one sentence: a life insurance policy that a company purchases to cover itself in case of the loss of life of a key executive. The company is the beneficiary of the policy, and the company pays the premiums.
That is the whole structure, and it is what every question about it turns on. Three roles that normally sit with three different people collapse into two:
| Role | In an ordinary life policy | In keyman insurance |
|---|---|---|
| Life insured | The individual | The key executive |
| Proposer / premium payer | The individual | The company |
| Beneficiary | The family / nominee | The company |
The executive's family gets nothing from this policy. It is not part of his pay, and it is not a benefit to him — it is the employer insuring a commercial exposure, in exactly the way it would insure a factory.
How it works
What the company is actually insuring. Not a life, in the ordinary sense, but the earnings that depend on that life — a founder whose relationships hold the order book, a chief executive whose departure would stall a fundraise, a technical head no one can replace within a year. The sum assured stands in for the profit the company would lose and the cost of finding and settling a replacement.
The tax treatment is the exception the paper tests. The general rule is that any sum received from a life insurance policy, including bonus, is exempt from tax. The workbook then lists the situations where it may still be taxed, and the very first one is:
So keyman insurance sits outside the section 10(10D) exemption that covers ordinary life policies. And the sum received is taxable under income from other sources — it appears by name in the workbook's own list of what that head contains, alongside rental income of plant and machinery, interest on securities and winnings from lotteries.
Read the two rules together. The company deducts the premium as a business expense and receives a taxable sum on the claim. There is no free money in the structure: the exemption that makes ordinary life insurance attractive is deliberately withheld here, because the policy is a commercial hedge rather than family protection.
A worked example
A mid-sized engineering firm insures its managing director, aged 48, on whose client relationships roughly Rs 40 crore of annual revenue depends. It takes a Rs 5 crore keyman policy and pays an annual premium of Rs 6,00,000.
Proposer and premium payer : the company
Life insured : the managing director
Beneficiary : the company
Four years in, the managing director dies. The insurer pays Rs 5 crore to the company.
Sum received = Rs 5,00,00,000
Exempt under section 10(10D)? = NO — keyman policy
Taxable under = Income from other sources
At a 25% corporate rate the company keeps roughly Rs 3.75 crore of the Rs 5 crore. It is the company that is assessed, not the family — and the managing director's own family receives nothing under this policy, which is precisely why an adviser must not let a client treat a keyman cover as the executive's personal life insurance.
The contrast worth putting to a client: had the managing director bought a Rs 5 crore term insurance policy himself with his family as nominee, the Rs 5 crore would have reached the family and, in the ordinary case, been exempt. Same sum assured, same life, entirely different owner and entirely different tax outcome. A well-advised family usually needs both, for different reasons.
Why NISM asks about it
Chapter 3 introduces keyman insurance in the list of insurance products (item j), and Chapter 12, section 12.8 (Tax aspects of Life Insurance Products) lists it as the first exception to the exemption of life insurance proceeds. The income from other sources table in the taxation chapter names it again.
The examinable points are exactly three: who buys and benefits (the company, on both counts), who is insured (the key executive), and the tax outcome — not exempt, and taxed as income from other sources. A question will usually describe the arrangement without naming it and ask who receives the proceeds, or hand you a list of life policies and ask which one's maturity or death benefit is taxable.
Common exam traps
- The company is the beneficiary, not the executive's family. This is the single most tested fact, and the intuitive answer is the wrong one.
- The company pays the premium. It is not deducted from the executive's salary and is not his policy.
- Section 10(10D) does not exempt it. "Any sum received from a life insurance policy including bonus is exempt" is the general rule; a keyman policy is the first listed exception.
- Taxed as income from other sources, where the workbook's table lists it explicitly — not as capital gains and not as exempt income.
- It is not Directors and Officers liability insurance. D&O covers the cost of claims made against officers; keyman covers the company for the loss of one.
- It is not the AIF key man clause either. That is a contractual right of investors when a named manager stops running a fund; this is an insurance policy.
- Series XIX-B's key-man insurance is a different subject — a Category III AIF insuring its investment manager against death, incapacity, kidnap or disability, at 1-2% of AUM. Answer from the paper you are sitting.
- It does not reduce keyman risk; it funds the consequences. The business still loses the person. Insurance pays money, not continuity.
Check yourself
1.In a keyman insurance policy, who is the beneficiary and who pays the premium?
- a)The key executive is the beneficiary and the company pays the premium
- b)The company is the beneficiary and pays the premium
- c)The key executive's family is the beneficiary and the executive pays the premium
- d)The company is the beneficiary and the executive pays the premium
Show the answer
Answer: (b) The company is the beneficiary and pays the premium
Keyman insurance is a LIFE INSURANCE POLICY THAT A COMPANY PURCHASES to cover itself in case of the loss of life of a key executive. THE COMPANY IS THE BENEFICIARY OF THE POLICY AND PAYS THE INSURANCE POLICY PREMIUMS. Note that although it appears in the non-life chapter, it is itself a life insurance policy, and it rests on Chapter 1's rule that employers have insurable interest in their key employees.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Keyman riskThe risk that a company depends so heavily on one or a few individuals that a change at the top can derail its decision making.
- Directors and Officers liability insuranceA liability policy covering board members, management and supervisory staff for personal liability and defence costs from claims alleging a wrongful act committed in the course of their duties for the company.
- Human Life ValueThe present value of the income a person is expected to earn over their remaining working life that is available for dependents — the upper bound on how much life cover is justified.
- Income from other sourcesThe head of income under which interest and dividends earned in a PMS are taxed, at the investor's slab rate — with no indexation or capital gains benefit.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- Sum assuredThe amount a policyholder chooses when buying a life insurance policy, paid to the nominee if the insured dies during the policy term — the figure a term insurance plan promises in full.
- Life insuranceThe product family that covers loss of income: temporary loss from disability and permanent loss from death — the first of the three covers in a household insurance plan.
- Key-man InsuranceInsurance a Category III AIF takes on a key executive, typically the investment manager, paying out on that person's death, incapacity, kidnap or disability — cost is usually 1-2% of AUM.
- Fidelity insuranceA policy that reimburses an employer for money or goods lost through an employee's forgery, fraud or dishonesty — taken wherever staff routinely handle significant cash or valuables.
- Liability insuranceIndemnity against damages payable under law for personal injury to third parties or damage to their property, whether the liability arises from negligence at common law or on a no-fault basis under statute.