Relevant Life Cover Vs Keyman Insurance: A Comprehensive Comparison for Indian Businesses

Life insurance policies play a crucial role in safeguarding the financial well-being of individuals and businesses. Two important types of life insurance policies that cater to the unique needs of businesses are relevant life insurance and keyman insurance. In this article, we will explore the differences between a relevant life insurance policy and a keyman insurance policy, helping you understand what is keyman insurance policy and what is relevant life insurance, and how they can benefit your business. By comparing relevant life insurance and keyman insurance policies, you can make an informed decision about which policy best suits your business's needs.

Relevant life insurance is a tax-advantaged, employer-funded life insurance plan created for a company's employees, directors, and contractors. In the event of a terminal disease diagnosis or death, a lump sum payment is made to the employee's beneficiaries under the death-in-service benefit. The main benefit of applicable life insurance is that it is tax efficient because employer premiums are typically deductible as business expenses, saving both the company and the employee a lot of money on taxes.

Keyman insurance, also known as key person insurance or key employee insurance, is a life insurance policy taken out by a business on the life of a vital employee, director, or partner. The primary purpose of keyman insurance is to protect the business against the financial consequences of losing a key individual due to death, critical illness, or permanent disability. The policy's payout is made to the business and can be used to cover the costs of recruiting and training a replacement, offset lost revenue, or repay outstanding debts.

To help you better understand the differences between these two types of policies, we will compare relevant life insurance and keyman insurance based on several factors:

1. Policy Purpose

Relevant life insurance primarily focuses on providing financial protection for the employee's family in the event of their death or diagnosis of a terminal illness. It serves as an attractive employee benefit and can help in staff retention and recruitment.

On the other hand, keyman insurance is designed to safeguard the business's financial stability in the event of losing a key individual. The policy payout can help the business continue its operations, recruit and train a suitable replacement, or repay outstanding debts.

2. Policy Beneficiary

In a relevant life insurance policy, the payout is made to the employee's beneficiaries, usually their spouse, children, or other dependents. The policy is set up in a trust, ensuring that the payout goes directly to the beneficiaries, bypassing the employee's estate and avoiding inheritance tax.

With a keyman insurance policy, the beneficiary is the business itself. The payout is made directly to the company, which can then use the funds to cover the financial consequences of losing a key individual.

3. Tax Implications

Relevant life insurance policies offer significant tax benefits* for both the employer and the employee. The premiums paid by the employer are generally tax-deductible as a business expense, while the employee does not have to pay income tax or National Insurance contributions on the premiums. Additionally, the payout is typically free from inheritance tax, as long as it is paid into a trust.

Keyman insurance policies, on the other hand, have different tax implications. While the premiums are usually tax-deductible as a business expense, the payout may be subject to corporation tax. It is essential to consult a tax professional or financial advisor to understand the specific tax implications of a keyman insurance policy for your business.

4. Policy Coverage

A relevant life insurance policy covers the employee's death or diagnosis of a terminal illness. Some policies also offer optional critical illness cover, providing additional financial protection in the event of the employee being diagnosed with a specified critical illness. However, it is crucial to consult a tax professional or financial advisor to understand the implications of including critical illness cover in a relevant life policy.

In contrast, a keyman insurance policy can cover various scenarios, including the key individual's death, critical illness, or permanent disability. The extent of coverage depends on the policy terms and conditions, and it is vital to carefully review the policy details to ensure it meets the business's requirements.

5. Suitability

Relevant life insurance policies are generally suitable for businesses of all sizes, especially those that may not have the resources or need to set up a group life insurance scheme. It can be a cost-effective solution for smaller businesses or companies with a limited number of employees.

Keyman insurance policies are best suited for businesses that rely heavily on certain individuals for their success and financial stability. Companies in various industries and sizes can benefit from keyman insurance, as it helps mitigate the financial risks associated with losing a vital employee, director, or partner.

When deciding between a relevant life insurance policy and a keyman insurance policy, it is essential to consider your business's specific needs and objectives:
1. Assess your business's risk exposure: Identify the key individuals in your business whose loss could have significant financial consequences. If losing a vital employee poses a substantial risk to your company's operations, a keyman insurance policy may be more suitable.

2. Evaluate employee benefit needs: If you are looking to enhance your employee benefits package and provide financial protection for your employees' families, a relevant life insurance policy could be the better option.

3. Consult a financial advisor or insurance professional: Engage the expertise of a financial advisor or insurance professional to help you assess your business's needs, compare relevant life insurance and keyman insurance policies, and choose the most appropriate policy for your business.

Understanding the differences between relevant life insurance and keyman insurance policies is essential for businesses looking to safeguard their financial future and protect their employees. By comparing relevant life insurance and keyman insurance, you can make an informed decision about which policy best suits your business's needs.

Both types of policies offer valuable financial protection, but their focus and beneficiaries differ. Relevant life insurance policies primarily provide financial security for employees' families, while keyman insurance policies protect the business against the financial consequences of losing a key individual. Carefully consider your business's specific needs, objectives, and risk exposure when choosing between these two types of policies, and consult a financial advisor or insurance professional to ensure you make the best decision for your business.