Claim Scenarios — Death Claims, Timelines & Tax on Proceeds
How a keyman death claim works: who claims, the settlement timelines under IRDAI's 2024 framework, when an insurer can question a policy under section 45 of the Insurance Act, 1938, and the tax on the proceeds.
Who claims and for what
A keyman claim is made by the business that owns the policy, and the money is paid to it. The trigger is the death of the key person during the policy term. Any other benefit depends on what the particular policy provides.
Two basic conditions have to hold at the date of death: the policy was in force, meaning it had not lapsed for unpaid premium, and its term had not expired. If either fails, there was no cover on that date.
The timelines
Under IRDAI's Master Circular on Protection of Policyholders' Interests of 5 September 2024, a death claim has to be settled within 15 days of intimation where no investigation is needed, and within 45 days of intimation where it is. Late payment carries interest at the bank rate plus 2%.
Older material quotes longer periods under the 2017 regulations. Those regulations were replaced in 2024.
When the insurer can question the policy
Section 45 of the Insurance Act, 1938 sets a time limit. After three years from the latest of the policy's issue, the commencement of risk, its revival or a rider, a life policy cannot be called in question on any ground. Within those three years the insurer can question it only for fraud or a material misstatement, and has to give written grounds.
Events after the policy was issued are a different matter. Cover and insurable interest are settled when the policy is taken, so a later fall in the company's revenue gives the insurer no ground to refuse a claim.
Tax on the money received
Keyman proceeds are excluded from the exemption for life policy proceeds and are taxed as business income of the business, whether or not the premium was claimed as a deduction. What the business keeps is the claim less tax, at whatever rate applies to it in that year.
Rules at a glance
Illustration: three situations
A trading firm holds a keyman policy on its managing partner. Consider three versions of events, all invented.
In the first, the firm misses premiums, the policy lapses, and the partner dies afterwards. There was no cover at the date of death. In the second, the partner dies a month after the policy term ended; again there was no cover. In the third, the policy is in force, but the firm's revenue has halved since it was issued. The fall in revenue changes nothing: the claim is payable on the policy's terms.
Tax on a keyman claim (assumed figures)
- Assume a company receives ₹3,00,00,000 as the death claim under a keyman policy and its tax rate is 25.17%. The rate is an assumption for arithmetic only.
- Tax on the proceeds: ₹3,00,00,000 × 25.17% = ₹75,51,000, about ₹75.51 lakh.
- Amount left with the company: ₹3,00,00,000 − ₹75,51,000 = ₹2,24,49,000.
Result. Tax of about ₹75.51 lakh is due and about ₹2.24 crore remains, at the assumed rate.
Key points
- The business that owns the keyman policy makes the claim and receives the money.
- The trigger is the key person's death during the policy term, with the policy in force.
- A death claim is settled within 15 days of intimation, or 45 days where investigation is needed.
- Late payment carries interest at the bank rate plus 2%.
- Under section 45 a life policy cannot be questioned on any ground after three years; within three years only for fraud or material misstatement, with written grounds.
- A fall in the company's revenue after issue is not a ground to refuse the claim.
- The proceeds are taxable as business income.
Common misunderstandings
- The claim is not paid to the key person's family: it goes to the business that owns the policy.
- The 15-day period is not counted from the last document: under the 2024 circular it runs from intimation.
- Section 45 does not leave fraud open for ever: after three years a life policy cannot be questioned on any ground.
- A weaker business at the time of death does not reduce the claim: insurable interest is tested when the policy is taken.
Questions people ask
What if the insurer pays late?
Interest is payable at the bank rate plus 2%.
Can the insurer repudiate in the second policy year?
Section 45 is about calling the policy itself in question: within three years the insurer can do that only for fraud or a material misstatement, giving written grounds. It does not change the policy's other terms, so matters such as the policy having lapsed or its term having expired still decide whether a claim is payable.
Does the tax on proceeds depend on having deducted the premium?
No. The proceeds are taxable as business income whether or not the premium was claimed as a deduction.
What this lesson relies on
- IRDAI Master Circular on Protection of Policyholders' Interests (5 September 2024)
- Insurance Act, 1938 — section 45
- Income-tax Act, 2025 — Schedule II (keyman policies excluded from the exemption)
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.