Wednesday, July 18, 2012

Keyman Insurance & Income Tax

Are you buying Key-Man Insurance for your business?

Two common questions?
1) Premium can claim tax (deductible for income tax)?
2) Insurance Proceeds need to pay tax (taxable receipt)?

The answer is, it DEPENDS.

The taxability of the insurance proceeds depends on whether it is a Term Life policy, Accident policy, Whole Life policy or an Endowment policy. If it is a Term Life or an Accident policy, the proceeds receivable will be taxable on the employer or the Company since the Insurance Premiums are allowable for tax deduction.

Conversely, where it is a whole life or an endownment policy, the proceeds available will be considered to be a capital receipt and not taxable on the employer or the company since the insurance premiums are not allowable for tax deduction.

In short,

Whole Life / Endowment => Premium NOT Deductible => Proceeds NOT Taxable

Term Life / Accident => Premium Deductible => Proceeds Taxable

Source / Reference:
Publlic Ruling No 2/ 2003 issued by Director General of Income Tax Department (aka LHDN)