Illustrative Scenarios — Applying Key Man Insurance Rules
Practice in applying the keyman rules to short invented scenarios: whose insurable interest supports the policy, what section 45 allows an insurer to question and when, and how to do the simple calculations that come up.
How to read a scenario
Every scenario in this station is illustrative. The businesses and figures are invented for practice and do not describe real companies or typical premiums. Where a calculation is asked for, every input is given in the question.
A useful habit is to ask three questions in order. Who proposed and owns the policy? Was there an insurable interest when it was taken? How long has the policy been in force? Most keyman scenarios turn on one of these.
Insurable interest belongs to the proposer
The business that proposes a keyman policy has to have an insurable interest in the key person's life when the policy is taken. That interest is the financial loss the business itself would suffer on the person's death.
Outsiders may have their own reasons for wanting the cover. A venture fund, for instance, may ask a start-up to take keyman cover on its founder before it invests. If the start-up proposes the policy, it is the start-up's insurable interest that supports it, not the fund's. Whether an investor asks for such cover, and on what terms, is a matter for each term sheet.
Section 45 in practice
Section 45 of the Insurance Act, 1938 works as a clock. It runs for three years from the latest of four events: the policy's issue, the commencement of risk, its revival, or a rider. Within those three years the insurer may call the policy in question only for fraud or a material misstatement, and has to give written grounds.
After three years the policy cannot be called in question on any ground. The older form of the section had a two-year period and left fraud open afterwards; the 2015 amendment replaced it. So an allegation of non-disclosure raised in the sixth year of a continuously running policy comes too late.
Premium figures in scenarios
Scenario premiums are invented. An actual keyman premium depends on the key person's age and health, the sum assured, the term and the insurer's underwriting. A ratio such as premium to revenue is simple arithmetic on the given figures and says nothing about what is usual.
Rules at a glance
Illustration: a claim in the fifth year
An imaginary logistics company took a keyman policy on its operations director. No revival took place and no rider was added. Five years later the director dies, and the insurer says an illness was not disclosed in the proposal.
The three-year period under section 45 ended two years earlier. The policy cannot now be called in question on any ground, so the allegation does not give the insurer a basis to refuse the claim. Had the same allegation been raised in the second year, the insurer could have acted on it only by showing fraud or a material misstatement and giving written grounds.
Premium as a percentage of revenue (assumed figures)
- Assume a firm with annual revenue of ₹40 crore pays ₹2.8 lakh a year for keyman cover. Both figures are invented.
- Write both in rupees: ₹2,80,000 and ₹40,00,00,000.
- Divide: 2,80,000 ÷ 40,00,00,000 = 0.0007.
- Convert to a percentage: 0.0007 × 100 = 0.07%.
Result. The premium is 0.07% of revenue in this example; the figure describes the invented numbers only, not typical premiums.
Key points
- Scenarios are illustrative; their businesses and figures are invented.
- The proposing business needs an insurable interest in the key person's life when the policy is taken.
- Where an investor asks for keyman cover and the start-up proposes it, the start-up's insurable interest supports the policy.
- Under section 45 a life policy cannot be questioned on any ground after three years.
- Within three years it can be questioned only for fraud or material misstatement, with written grounds.
- An actual premium depends on age, health, sum assured, term and the insurer's underwriting.
Common misunderstandings
- The investor's interest does not support the policy: the proposer, here the start-up, is the one that needs insurable interest.
- Fraud is not an exception that survives for ever under section 45: after three years the bar applies on any ground.
- The three years do not always run from issue: they run from the latest of issue, commencement of risk, revival or a rider.
- 0.0007 is not 0.7%: multiplying by 100 gives 0.07%.
Questions people ask
If a policy lapsed and was revived, from when do the three years run?
From the latest of the four events, which would be the revival if it came last.
Can a scenario's premium be used as a benchmark?
No. Scenario figures are invented; real premiums depend on the life assured, the sum assured, the term and underwriting.
Does a term sheet create the insurable interest?
No. The interest is the financial loss the proposing business would suffer on the key person's death.
What this lesson relies on
- Insurance Act, 1938 — section 45 (as amended in 2015)
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.