Tax Treatment for Keyman Insurance

Key-man insurance is an insurance taken out by employer insuring against loss of profits arising from the death, critical illness, sickness, accident or injury of a key executive or employee.

Key-man insurance whether tax deductible for Company are depend the following circumstances:-

1) The right to the insurance proceeds must remain with the employer or company and must not be payable to the “key-person” or his family.

2) The policy is allowable if the insurance has no element of investment. (for example: term life and accident policy)

3) Premium paid for a “key-man” insurance policy on the life of a director or an employee who owns shares in the company is not an allowable deduction.

4) The policy on the life of a partner or sole-proprietor also not allowable due to the “key-man” policy is applicable only in the case of an employer and employee relationship. Partner or sole proprietor is not employee.

Insurance proceeds received taxable?

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. However, the proceeds receivable in connection with a whole life or an endowment policy is not taxable as the insurance premium has not been allowed.

Details please refer Public Ruling No. 2/2003 "Key-Man" Insurance.