It protects against business risk in the event of unfortunate death of the key person. The premium paid will be treated as business expenses and the company would save 30% plus surcharge on every rupee of premium paid for such a policy as per current tax law. Disruption of lines of business credit due to the death of the Keyman can seriously affect the business. Here, the insurance money can help as a guarantee of loan repayment in case of death of the key person.
The morale of the key employee is boosted. He/she feels important. The sense of belonging increases productivity and helps in retention of the key employee.
It helps in keeping the market price of the company's shares stable in case of death of the keyman. If the keyman dies the price of the company's shares is likely to fall but if the investors know that any financial loss can be made up through the insurance proceeds, they may not start offloading the shares immediately. It protects the company's valuation. For example, in case of the company being put up for sale, prospective buyers are likely to put a higher value to the company if they know that it has a monetary back-up (insurance) to meet the cost of replacement of its key person.