Thursday, November 1, 2012

Tax Issue for Keyman Insurance

Key-man” insurance
1  Generally, a premium paid on an insurance, which is intended wholly and exclusively to recover moneys that would replace a loss of profits on the happening of the event insured against, would be allowable as a deduction against the gross income of a business. 
2  Death, critical illness, sickness, accident or injury of an employee or a director may result in a loss of business income for the employer or company.
Insurance may be taken on the life of an employee or a director who is a “key” person to cover the risk of loss of business income. This type of insurance is known as “key-man” or “key-person” insurance. 
3  The  right to the insurance proceeds of a “key-man” insurance must remain with the employer or company and the proceeds must not be payable to the “key-person” or his family. 

Can save tax - Deductible

The premium on the policy is allowable if the insurance has no element of investment and the insurance is taken on the life of a “key-person” whose absence would result in a reduction in  the  profits of the employer or the company.  

Insurance Proceeds - Taxability
The proceeds receivable on a term life policy or an accident policy is taxable on the employer or the company as the sum is receivable in respect of an insurance premium that  has been allowed previously. On  the other hand, the proceeds receivable in connection with a whole life or an endowment policy is not taxable as the insurance premium has not been allowed. 

Public Ruling No:  2/2003 
Issue Date:  30 December 2003