Is your key man insured?

The demise of a vital anchor in any organisation may create turmoil amid investors and other stakeholders; there are covers to address this.

The recent and sudden death of Ved Arya Prakash of Milestone Capital Advisors is one of many such cases in recent years, wherein such an unexpected death has led to investor unrest and been a setback to the firm. Milestone was a non-institutional company with $1 billion of assets under management (AUM), built solely around one individual's strengths.

No doubt, these companies are at far greater risk, but even large institutions do tend to depend heavily on only certain people. In such cases, having a 'key man insurance policy' is useful. According to Niraj Jain, CEO and Principal Officer, of Insurancemall.in, "Fund houses and start-ups need these policies a lot more than mature and well established companies."

Companies wanting such a policy are sold a term plan. Says Jain, "The product was abused and misused by a lot by companies, who would often take these policies in March for their taxation benefits and then cancel it, often within the free-look period itself. Hence, the Insurance Regulatory and Development Authority came out with strict norms against this and mandated that term policies with no maturity value before the death be sold as key man insurance."

Key man insurance in India is currently an employer-employee policy, where the employer is the nominee and pays the premiums and collects the amount in case of the employee's death. The sum assured should take care of any estimated loss.

Pradeep Diwan, agent of the Life Insurance Corporation (LIC), such polices are more popular among private companies rather than larger organisations. While net profits used to be very important when buying such policies, these days an individual's salary is the key component to determining the cover. It is up to the company to decide which of its key management members it wants to cover. It needs to specify, in a questionnaire, why they're taking the cover for this person and the importance of the person to the company's bottom line. The premium amount depends on the person's age and policy value; it is an eighth or a tenth the cost of a normal endowment cover premium.

Some private companies, especially smaller companies, have their directors and CEOs insured. The insurance would provide some indemnity in the event of loss of this key person. LIC, ICICI Prudential Life Insurance and SBI Life Insurance are the major players in this 'key man insurance' segment.

Nowadays, most private equity firms have key man clauses and insurance, as the fund manager or promoter is often the vital part of the business. Also, with so many investors and a large amount of money at stake, knowing the losses arising out of tragedy would be mitigated by key man insurance is a load off one's mind when dealing with the implications of an unexpected death.