Key Man Insurance Policy/Buy and Sell Insurance Policy

 

 

Question:

Is the following insurance  Ja’iz?

1.Key man policy

2. Insurance for business , whereby is there are three shareholders if one dies this product will pay out the family of the deceased the value of his share of the business.

 


Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykumwa-rahmatullāhiwa-barakātuh.

 

A Key Man is defined as:

“A key person is someone who is fundamental to the running of the business, who through their knowledge, skill or expertise, contributes to the profitability of the business.”

(http://www.liberty.co.za/our-products/business-solutions/pages/business-assurance/key-person-insurance.aspx

 

A Key Man insurance policy is defined as:

“A life insurance policy that a company purchases on a key executive's life. The company is the beneficiary of the plan and pays the insurance policy premiums.”

(http://www.investopedia.com/terms/k/keypersoninsurance.asp)

 

How Key Man insurance policy works:

 

“A company purchases a life insurance policy on its key employee(s), pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff. The reason this coverage is important is because the death of a key person in a small company can cause the immediate death of that company. The purpose of key person insurance is to help the company survive the blow of losing the person who makes the business work.”

(http://www.entrepreneur.com/encyclopedia/key-person-insurance)

The second policy is defined as a ‘Buy and Sell insurance policy’.

 

Buy and Sell insurance policy is defined as:

 

“A buy and sell agreement is for example where there is a partnership and the partners enter into an agreement which determines that upon the death of one of the partners, the remaining partners can buy out the share of the deceased partner.  This type of agreement can also be entered into between directors of companies or members of Close Corporations.  This buy and sell agreement will normally be backed by a buy and sell policy, which will mean that the proceeds of the policy will be used to buy out the deceased partner’s/director’s/member’s interest in the business.  The policy must have been taken out for the purpose to buy out the interest of the deceased person, or a part of the interest, otherwise the policy will not be exempt from deemed property and will be included in the estate of the deceased person.”

(https://www.findanadvisor.co.za/content_buy-and-sell-agreement)

 

“In order to ensure the availability of funds in the event of a partner's death, most parties will purchase life insurance policies on the other partners. In the event of a death, the proceeds from the life insurance policy are used to purchase a portion of the deceased's business interest.”
(http://www.investopedia.com/terms/b/buy-and-sell-agreement.asp)

“When using life insurance with a buy-sell agreement, either the company or the individual co-owners buy life insurance policies on the lives of each co-owner (but not on themselves). If you were to die, the policyowners (the company or co-owners) receive the death benefits from the policies on your life. That money is paid to your surviving family members as payment for your interest in the business. If all goes well, your family gets a sum of cash they can use to help sustain them after your death, and the company has ensured its continuity.”

(https://us.axa.com/life-insurance/funding-with-life-insurance.html

 

It is clear from the above that both, Key Man Policy insurance and Buy and Sell insurance are not permissible. They are conventional insurance schemes that have within them elements of interest, gambling and contract of uncertainty, all of which are prohibited in Shari’ah.

 

You may see the following link for our research on the issue of insurance:

 

http://www.askimam.org/public/question_detail/34288

 

 

And Allah Ta’āla Knows Best

Maaz Chati

Student DarulIftaa
Blackburn, England, UK

Checked and Approved by,
Mufti Ebrahim Desai.

KHARWASTAN

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