Key man insurance

What is key man insurance?

Key man insurance is life cover that a business takes out on a person whose skills, relationships or decisions drive its revenue, such as a founder, managing director, top salesperson or partner. The business is the proposer, pays the premium and receives the claim. If the key person dies during the term, the money helps the business cover lost profit, repay loans, recruit a replacement or reassure lenders and clients.

The business has an insurable interest in the key person because their death would cause it a measurable financial loss. That interest, not a family relationship, is what makes the contract valid.

How key man insurance works in India

The policy. Most keyman covers are term plans, though some businesses use savings plans to build a fund the company can use when the person retires. The business decides the sum assured, and the insurer underwrites it on two fronts: the medical and lifestyle risk of the key person, and the financial justification. Insurers usually look at the person's role, pay, share of profits and the company's financial statements to decide how much cover is reasonable.

Tax treatment. The tax rules are what define a keyman policy in India. Under the Income-tax Act, 1961:

• The Explanation to section 10(10D) defines a keyman insurance policy as a life policy taken by a person on the life of another who is or was an employee, or is or was connected in any way with that person's business.
• Section 10(10D) excludes sums received under a keyman policy from its exemption, and section 28(vi) taxes them as profits and gains of business, including any bonus.
• CBDT Circular No. 762 of 18 February 1998 treats the premium as an allowable business expense. CBDT Circular No. 38 of 2016 accepted High Court rulings allowing a firm to deduct premium on a policy on a partner's life.
• A Finance Act 2013 amendment provides that a keyman policy keeps that status even if it is assigned to someone else during its term. Tax tribunals have differed on how this applies to policies assigned before the amendment took effect.

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, with the government describing it as a simplification that keeps existing tax policy. Section numbers have changed, so tax advice and sales material should cite the new Act for tax year 2026-27 onward. Businesses should confirm the current provisions with their tax adviser.

What happens on exit. When the key person leaves or retires, the business may surrender the policy, keep it, or assign it to the person. Because of the 2013 amendment, assignment does not turn a keyman policy into a tax-free personal policy for the assignee.

What key man insurance means for distribution

Keyman cover is a business-to-business sale that sits between individual life and group insurance. It suits advisers and relationship managers who already work with business owners, such as bank SME teams, chartered accountants' networks and brokers.

• Lead with the business problem. The conversation is about what happens to revenue, loans and client confidence if one person is gone, not about family protection. A simple profit-contribution estimate is more persuasive than a product brochure.
• Expect financial underwriting. Large sums assured need audited financials and a clear rationale. Preparing these with the client's accountant before the proposal saves weeks.
• Get the parties right. The business is proposer and beneficiary; the key person is the life assured and must consent and disclose health details truthfully. Mistakes in who signs what can make the claim harder.
• Be careful with tax claims. Advisers should describe the tax position in general terms and point clients to their tax adviser, especially now that the Income-tax Act, 2025 has new section numbers.
• Plan for the person's exit. Agreeing at the outset what happens to the policy if the key person leaves avoids disputes and lapses later.
• Pair it with personal cover. The key person's own family is not protected by a keyman policy. That gap is a natural second conversation.