Employer-Employee Insurance Framework — Structure & IRDAI Guidelines

A label, not a product

Employer-employee insurance is a loose market term. It describes an arrangement, and the rules that apply are those for the group or individual product actually used. In practice it is used for two arrangements that look similar because an employer arranges and usually pays for both, but that work in opposite directions when a claim arises.

The question that separates them is simple: who gets the money?

Group schemes: for the employees

In a group scheme the employer is the master policyholder and the employees are members. One contract covers the whole group. The permitted employer-employee group products are group term life, group gratuity, group superannuation and group leave-encashment schemes, under the IRDAI (Insurance Products) Regulations, 2024 and the Master Circular on Life Insurance Products of 12 June 2024.

In a group term life scheme each member names a nominee, and the death benefit goes to that nominee. Death proceeds of a life policy are exempt from income tax under section 11 read with Schedule II of the Income-tax Act, 2025 (section 10(10D) of the 1961 Act).

Keyman insurance: for the employer

Keyman insurance is a term policy the employer takes on the life of an important employee for its own protection. The employer proposes the policy, pays for it and receives the proceeds. The employee is only the life assured.

The employer needs an insurable interest, which is the financial loss the business would suffer if the key person died. In life insurance that interest is tested when the policy is taken, not at the time of the claim. The documents an insurer asks for to establish the employment relationship vary with its underwriting practice.

Keyman policies are expressly excluded from the exemption for life policy proceeds. The proceeds are taxable as the employer's business income, whether or not the premium was claimed as a deduction.

Voluntary and statutory

Group term life cover is voluntary: no law requires an employer to buy it. Statutory benefits such as provident fund, gratuity and ESI are a separate layer, and they now sit under the Code on Social Security, 2020, in force from 21 November 2025.

Rules at a glance

Key points

• Employer-employee insurance is a market term, not a defined regulated product.
• Group schemes: the employer is master policyholder, employees are members, and in group term life the nominee receives the death benefit.
• Permitted employer-employee group products are group term life, gratuity, superannuation and leave-encashment schemes.
• Keyman insurance is a term policy for the employer's own protection; the employer receives the proceeds.
• Insurable interest is tested when the policy is taken.
• Keyman proceeds are taxable as business income; other life policy death proceeds are exempt under section 11 read with Schedule II.
• Group term life is voluntary; statutory benefits sit under the Code on Social Security, 2020.

Common misunderstandings

• The term is not the name of a single product: it is market shorthand for group schemes and keyman cover, and the rules that apply are those for the product used.
• The employer paying the premium does not decide who benefits: in group term life the nominee receives the claim, in keyman insurance the employer does.
• Group term life is not compulsory: it is a voluntary benefit, separate from the statutory ones.
• Keyman proceeds are not exempt like other life policy proceeds: they are expressly excluded and taxed as business income.

Questions people ask