Key-man insurance is a life insurance policy taken on the life of a key-man with a view to providing liquidity, financial strength

and indemnity to the business organisation in case of losses on account of death, absence or exit otherwise of its key-men from the business. HUMAN skills and intellectual capabilities form the nucleus of India's real and perceived competence. Skills, capabilities, confidence and competence are interrelated and will together play a critical role in the future course of economic development. The inter-relationship makes each one of these indispensable. If the skills of firms and companies diminish, so can their confidence. If some intellectual capabilities diminish, their perceived competence could diminish. Hence, the promotion of confidence and perceived competence could be better served by paying attention to how firms and companies manage the acquisition of key skills and the retention of key intellectual capabilities possessed by their key people. India has a large base of skilled managerial resources, and this base can be used effectively to achieve the 7-8 per cent economic growth aspirations. Proper use of the resource base could place India at the top of the global pyramid of managerial resources. However, too many hurdles in

the form of defective legislation, myopic policies and lack of visionary attitudes of decision-makers have led to the gross under-utilisation of the true potential of this resource base. Key-man insurance, a critical corporate and managerial tool, has been made less effective and less attractive by the economic strings and the tax tag that are attached to it. These act as economic and social disincentives. These deficiencies require to be eliminated. The restoration of the constructive incentives to key-man insurance will speed up corporate growth, especially in the small and medium enterprise (SME) sector. Such growth will spur all-round industrial and national growth. The restoration will lead to the better use of key-man insurance and to deriving the benefits of its potential.
Asymmetry in taxation

Every organisation has a key-man or a group of keymen directly affecting the performance, profitability, health and continuity of business. Key-man insurance is a life insurance policy taken on the life of a key-man with a view to providing liquidity, financial strength and indemnity to the business organisation in case of losses on account of death, absence or exit otherwise of its key-men from the business. Corporate and partnership firms can, subject to certain eligibility criteria and conditions,

opt for this scheme for their key-men. While the premia paid on the lives of key-men are allowed as business expenditure under Section 47 of the Income-tax Act, Clause 10D of Section 10 has been amended to exclude any sum including bonus received under key-man Insurance so as to tax the same as business profits in the year of receipt. The tax treatment of claim and maturity proceeds of key-man insurance or of its surrender value or any sum received under key-man insurance differs from the tax treatment of other insurance policies. In the case of risk policies such as fire, motor, marine and engineering, the premium paid is generally a small percentage on the sum assured and is taken for a period of one year. While the premium paid is allowed as business expenditure, any amount received on account of claims on such policies over and above the book value is treated as business income. In the case of life insurance policies of employees paid by the employer, the premium is not allowed as business expenditure. Rebate as per Section 88 is applicable to the insured as long as the life insurance premium is paid for self or spouse or dependent children from and out of the total income of the insured that financial year. Life insurance policies are by design endowment policies; their maturity proceeds are exempt from

tax under Section 10 of the Income-tax Act. However, claim or maturity proceeds, including bonus or surrender value or any sum received under or from a key-man insurance policy, would be taxed at the hands of the recipient the employer or the employee as the case may be. All sums received under key-man insurance (of course, after a lock-in period) should have been made tax-exempt. Keyman insurance is like an endowment policy of longterm nature taken on the lives of key-men of an organisation. The premium paid under key-man insurance is substantial. Nevertheless, by taxing the maturity value, the claim proceeds and the liquidity of the organisation shrink. Hence, the full proceeds are not available to mitigate the hardship faced by the organisation on account of exit or absence of its key-men.
Reinvest, reinforce

With the current level of corporate taxation and an additional surcharge for companies and firms, a substantial sum out of the maturity value and claim proceeds would go towards enhancing taxes collected. Considering the same logic of life risk, savings and endowment patterns of personal life insurance, the same exemption from tax should have been given for claims and maturity values under key-man insurance. There is little justification

for undermining the importance of key-man insurance. The proceeds on surrendering the keyman insurance policy by the employer to the insurance company or for assigning the key-man insurance policy by the employer in favour of the employee before a prescribed lock-in period (of six years at least) may be taxed to avoid circumventing the tax liability through the misuse of key-man insurance. At the same time, the prudent and expedient tax exemption of key-man insurance would fuel economic growth. Enhanced insurance coverage of key human resources in the various economic sectors would spawn a significant sense of economic and social security. In particular, SMEs would be better placed to confront the unexpected. Since insurance companies invest a sizable quantum on infrastructure and core sectors of funds indirectly through the government, additional funds accessed through key-man insurance schemes may be used to vigorously promote growth. But tax exemption is central to the reinforcement of key-man insurance and the investment in infrastructure that SMEs depend upon. A virtuous cycle would be the result. First, SMEs will be the indirect investors in infrastructure that they use. Second, their newfound sense of economic and social security will lead to the better utilisation of infrastructure.

Better late than never

A large magnitude of long-term funds could be redirected by the insurance sector through key-man insurance into infrastructure. Funds redirected by insurance companies are typically associated with a lower cost of capital. The large magnitude of funds and their lower cost will produce extraordinarily useful social and economic results. These will have a significant impact on how the economy grows through the constructive efforts of SMEs and the big companies. Proceeds from keyman insurance are similar to those from personal life insurance. Nevertheless, the myopic provision for taxing proceeds from key-man insurance has shut off the flow of long-term funds and the generation of social benefits at the lower levels of the nation's economic pyramid. Government may have inadvertently shut off a vital and perennial source of long-term funds. It may have overlooked the long-term requirements of SMEs and the segments of society that they serve. It may have failed to reckon with how low-cost funds may be redirected to serve India's vast underserved rural locales. The impact of diffuse and widely used key-man insurance on the prospects for growth could be handsome. Government should evaluate the necessity to provide tax exemptions pertinent to

key-man insurance. The evaluation should deal with the claims, maturity value, surrender value and consideration for assignment (after the lock-in period). The larger interests of society, the economy and the nation's human resources should guide the evaluation.