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Is key-man insurance tax deductible?
Key-Man Insurance
You may have heard of the saying “a company is only as good as its people”. At the end of the day, a business is run by people. Without the pivotal man or woman playing their respective roles in a company, the organisation may face the danger of crumbling apart.
That is why having a key-man insurance policy is crucial as it is intended wholly and exclusively to recover the risk of loss of business income on the occurrence of an event to an employee or a director who is a key-person. Said event can refer to death, critical illness, sickness, accident, or injury. 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 as stated in Inland Revenue Board of Malaysia (IRBM) Public Ruling No. 2/2003.
Eligibility for Tax Deduction on Premium Paid for Key-Man Insurance
Conditions for eligibility:
- The insurance has no element of investment (no cash value in return);
- It expires at the end of the insured period;
- The insurance is taken on the life of a “key-person” whose absence would result in a reduction of the profits of the employer or company;
- The employer or company is the beneficiary of the insurance policy, and the insurance proceeds must remain with the employer or company; and
- The insured “key-person” is not a shareholder.
The insurance proceeds receivable will be taxable on the employer or company as the relevant insurance premium paid has been allowed for a tax deduction previously.
Term life and accident policies have no element of investment. Besides that, these policies expire at the end of the insured period and there is no return on the premium paid if the insured person lives or is not injured. Therefore, the premium payable on a term life policy or an accident policy of a “key-man” insurance is allowable as a deduction against gross income from a business.
On the contrary, a whole life policy and an endowment policy have elements of investment, so they can be regarded as capital assets of a company. These policies have redeemable cash values after being in force for a few years. For an endowment policy, there is a lump sum that is payable upon the maturity of the policy. Hence, the premium payable on a whole life or an endowment policy is not allowable as a deduction in arriving at the adjusted income from a business of a company. In this situation, the insurance proceeds receivable is not taxable as the relevant insurance premium paid has not been allowed for a tax deduction previously.
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