How some firms use a loophole to save tax with keyman insurance

Unlike typical keyman policies, these come with a savings plan and the maturity benefit is given to employees

- Aprajita Sharma

• Many insurers are offering a new type of keyman policy, but with a savings plan rather than a pure term plan

Employee stock options (Esops), bonuses, and health insurance. These are a few perquisites given by companies to retain top talent. A few employers provide life insurance as well.

Typically, there are two types of life insurance policies offered to employees: keyman life insurance and employer-employee (E-E) insurance. In the first, the life insured is of key managerial persons (KMPs)—the employees whose services are indispensable to run the company, as defined by The Companies Act, 2013. The proposer and the premium payer is the employer, who is eligible for tax exemption on premium payments.

In case of an eventuality, the company gets the death benefit and the proceeds are added to the company’s business income. Insurance regulator Irdai, however, has specified that only pure-term plans can be bought under a keyman policy. The benefits can thus be claimed only if an employee dies in harness. The policy lapses if the employee quits the company ahead of the maturity period.

E,-E insurance, though, can incorporate a savings life plan—a financial product that combines savings and life insurance into a single package. Employers can buy it for one or multiple employees. The premium is paid by the employer, with the employee as the proposer. The life insured will be that of the employee. The premium payment by the employer will be considered as perquisite in the hands of employees and will be taxable. The maturity benefit, however, is received by the employee and is tax-exempt up to the defined limits.

Now, a seemingly new policy construct has made its way to the industry. It is essentially a keyman insurance but with a savings plan that is supposed to benefit employees eventually.