Page 37 - Life Insurance underwriting Ebook IC 22

According to the Indian Law, there is no clear definition available of a key person. But
the following aspects can help in qualifying the proposed insured as a key person.

a) Age
b) Level of expertise
c) A successful track record
d) Earning trends of the company over a period of time
e) Number of key persons in a company

Key man insurance is linked with the profitability of the company. Therefore, the amount
of cover granted can be broadly arrived at by using the following guidelines.

 3 times the average gross profit of the company for the last three years (gross
profit means profit before depreciation and taxation)
 5 times the average net profit of the company for the last three years.
 10 times the total annual compensation package for the key man which include
salary, bonus and all other perquisites.

The total permissible amount of the key man insurance for a company will be the
minimum of the amount arrived at on the basis of the above three methods. If there are
more than one key man in the company, the overall limit will be governed by the same
principle, and the sum assured granted to the various key persons will not exceed the
overall limit arrived at by the above methods.

4. Explain partnership insurance, employer-employee insurance schemes and
insurance under HUF

4.1 Partnership insurance

The need for partnership insurance

In a partnership business, when a partner dies the legal heirs of the deceased partner
may not be interested in continuing the partnership. The remaining partners will have
the option to purchase the deceased partner's share on the terms and conditions spelt
out in the partnership deed. This would require I sufficient funds.

The need for partnership insurance is seldom realized until a partner dies and the
money required to be paid out has to be recovered from the partnership funds ho
the absence of partnership insurance, the surviving partners may be compelled d
sell some of the assets or may have to close down the business. Hence it
becomes advantageous to have a life insurance cover on the lives of all the
partners. The proceeds of the insurance policy can be utilized for settling the
account of the deceased partner without disturbing the working of the firm.

Amount of cover

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