Policy Structure — Ownership, Premium Payment & Benefit Assignment
How a keyman policy is put together: the business owns it, pays for it and receives any claim; the key person is the life assured; the cover is term insurance; and the policy can be assigned under section 38 of the Insurance Act, 1938.
Who holds which role
A keyman policy has a simple structure. The business, which may be a company, a firm or an LLP, is the proposer and the policyholder. It pays the premium and it receives any claim. The key person is the life assured and has no ownership rights in the policy.
This is what separates keyman insurance from a personal life policy, which the insured person owns and whose proceeds go to that person's nominee or heirs. Here ownership and benefit both sit with the business, because it is the business's loss that is insured.
The type of plan
Keyman cover is described as term insurance: it pays on the death of the life assured during the policy term. An IRDA circular of April 2005 limited keyman cover to term plans.
Older material describes endowment or whole-life keyman plans, with savings built in. That material should not be relied on. An insurer's current product terms show what it offers.
Assignment under section 38
Assignment is the transfer of a policy from one owner to another. Section 38 of the Insurance Act, 1938 governs it for life policies. The assignment is made by an endorsement on the policy or by a separate instrument, signed and witnessed, and notice has to be given to the insurer.
The insurer is not bound to act on every assignment. It may decline, giving reasons, within 30 days. Once an assignment takes effect, the rights and liabilities under the policy pass to the assignee.
A company may use this route to transfer a keyman policy to a key person who is leaving. The tax treatment of such an assignment is not settled, so no fixed result can be stated here.
Rules at a glance
Illustration: roles on the policy schedule
An engineering company takes keyman cover on Meenakshi, its head of research. On the policy schedule the company appears as proposer and policyholder, and Meenakshi as the life assured. The premium is paid from the company's bank account.
If Meenakshi dies during the term, the claim is made by the company and paid to it. Her family receives nothing under this policy, which is separate from any personal life insurance she may hold. If she resigns instead, the company may keep, stop or assign the policy. An assignment to her would need a signed and witnessed endorsement or instrument and notice to the insurer under section 38.
Key points
- The business is the proposer and policyholder; it pays the premium and receives any claim.
- The key person is the life assured and has no ownership rights.
- Keyman cover is term insurance; an IRDA circular of April 2005 limited it to term plans.
- Older descriptions of endowment or whole-life keyman plans should not be relied on.
- Section 38 of the Insurance Act, 1938 governs assignment: a signed, witnessed endorsement or instrument, with notice to the insurer.
- The insurer may decline to act on an assignment, with reasons, within 30 days.
Common misunderstandings
- The key person is not a co-owner: the life assured has no ownership rights in a keyman policy.
- Keyman cover is not a savings plan: it is term insurance, and older accounts of endowment or whole-life keyman plans are out of date.
- An assignment is not complete by a private understanding: section 38 calls for a signed, witnessed endorsement or instrument and notice to the insurer.
- The tax result of assigning the policy to the key person is not fixed: the treatment is unsettled.
Questions people ask
Who pays the premium?
The business that owns the policy.
Can the insurer refuse an assignment?
It may decline to act on it, giving reasons, within 30 days.
What passes to the assignee?
The rights and liabilities under the policy.
What this lesson relies on
- Insurance Act, 1938 — section 38
- IRDA circular of April 2005 on keyman insurance (term plans)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.