Is Key Person Insurance Tax Deductible?

Key person tax treatment in a nutshell

Is it tax-deductible?

The tax treatment of keyman policy will differ depending on whether it is used for:

Just like any other types of insurance policies, key person insurance has both tax-deductible and non tax-deductible components.

Whether the premiums of key man insurance are tax deductible or tax payable depends on how the ownership of the key man insurance is structured.

Revenue purposes vs capital purposes

If a policy is taken for revenue purposes, then the premium may be tax deductible and the benefit also subject to tax. If a company receives a sickness or disability benefits through the policy, then CGT will apply. It is wiser to factor in the possibility of CGT increasing the sums insured.

However, premiums and benefits are not tax deductible if a policy is taken for capital purposes and the benefit is received by the original beneficiary, then the premium and the benefit are both not tax deductible.

Purpose and conditionsPremiums deductible?Benefits taxed?Benefits impacted by capital gains tax?
Revenue Purposes
  • Yes
  • Yes
  • No
Capital purposes
  • No
  • No
  • No
  • Only for business taxes
  • Only for business taxes
  • Benefits are subject to capital gains tax if the recipient is not business, and is not a relative of the key person
DISCLAIMER: This article contains general advice and does not consider your own personal circumstances. It is not tax advice and the general nature of this material may not be applicable to you. You should obtain professional advice and verify our interpretation before relying on the information contained in our article.

Key person insurance for 'revenue purposes'

Key person insurance is considered to be bought for revenue purposes (e.g. running of day-to-day business activities that directly result revenue) if it has been bought for any of the following reasons:

  • Finding a suitable replacement: If a key person is unable to work due to being injured seriously or because of an untimely death, then it may be necessary to find a permanent replacement for such a person. If key person insurance is purchased to raise funds for the costs of advertising the position and interviewing potential candidates, it is considered to be for revenue purposes.
  • Temporary replacement costs. If key person is temporarily available and will return to the business shortly, all expenses that are incurred in finding a temporary replacement too will be considered to be for revenue purposes.
  • Replacing lost income: If losing a key person results in a loss of income for the company, or if the business profits have taken a hit due to the loss of the key person, than all such activities that are undertaken for replacing the lost income will come under the scope of revenue purposes.

Yes, it's tax-deductible

When key person insurance is purchased for such reasons, the premiums paid for the insurance will be tax deductible. However, any benefits received from the insurance will be assessable for Term Life, TPD and Trauma insurance.

Key person insurance for 'capital purposes'

If key person insurance is purchased to back a loan of the company, or to enhance its goodwill after losing a key person, or to ensure that company debts are repaid then all such reasons are considered to be 'capital purposes'.

Essentially, if the funds from the key person insurance are not used to generate revenue but are instead used to strengthen the company as an asset after the loss of its key person, then they are considered to be for capital purposes.

It's not tax-deductible

In such situations, the premiums paid for the insurance will not be tax deductible. However, benefits received from Term insurance will not be assessed as income, whereas benefits received directly by the business for TPD and Trauma insurance will be assessed for Capital Gains Tax.

Keyman insurance tax frequently asked questions

In what situations are premiums for key-person insurance not tax deductible?

Premium payments:

  • Not deductible and not assessable if life insurance policy is covered
  • Are deductible and can be treated as assessable if an accident/sickness or term life policy is covered.

Are the proceeds of key man insurance taxable?

Cover type and useAre benefits assessable?Are insurance benefits subject to capital gains tax?
Life insurance for revenue purposeYes benefits assessable at applicable tax rateNo, unless the recipient acquired the interest for consideration and was not the original beneficial owner
Life insurance for capital purposeNoNo
TPD and critical illness insurance for revenue purposeYes benefits assessable at applicable tax rateYes, provided the recipient is not the insured or a relevant of the insured
TPD and critical illness insurance for capital purposeNoNo

Are buy sell life insurance premiums tax deductible?

Premiums are deductible to self-employed workers for cover that will provide an income during the period that they are unable to work.

If a policy provides a benefit payment for disability or death, the component of the policy covering death will not be tax deductible unless:

  • The premium payment is provided for revenue purpose
  • The policy has been taken out to prolong the business
  • The employer owns the policy
  • The employer is the recipient of the policy benefit.

Is key person disability income taxable to a business?

The premium payments for key person disability insurance are generally tax deductible. Benefit payment will be taxed as part of the employer’s assessable income.

What are the various types of keyman insurance?

Keyman insurance is not exactly a specific type of policy as it is used to loosely describe the different types of cover that employers might take out for their employees. Keyman insurance can be taken out as:

  • Life cover: Benefit paid in the event that the insured worker dies.
  • Trauma cover: Benefit paid in the event the insured worker suffers a trauma condition listed in the policy.
  • Disability cover: Benefit paid in the event the insured suffers a disability.

A buy/sell agreement ensures that in the event that one business owner suffers an insured event i.e. death, trauma or disability, the respective obligations of the business are executed in an appropriate fashion.

What does it mean if you want life insurance for capital purposes?

Business owners must attribute their use of key-person insurance as either capital or revenue protection:

    • Revenue purposes: Used for the replacement of lost income and lost profits
    • Capital purposes: Used for compensation for loss of goodwill, repayment of outstanding debts, discharging security of the guarantor’s property.

Capital protection ensures that outstanding loans can be repaid without having to withdraw from the businesses cash reserves following the loss of a key worker.

Benefits of key person insurance

Key person insurance protects both the company and the key person in your organisation. Aside from this protection, key person insurance may benefit you for by funding some issues that may arise as a result of their death or disability. Some of these benefits are as follows:

  • Protects profits: A lump sum payment is paid to help minimise loss to revenue, sales, and profits until a replacement is found.
  • Covers debt: It is a fact that companies have loans and outstanding debts they are repaying. This is not at all bad since it is necessary for the growth of the company. However, the death of a creditor or a guarantor can result in a mess without insurance. These situations could affect the company standing unfavourably. But with key man insurance, your business is protected against creditors.
  • Covers liquidity: Most businesses have liquidity problems and can be aggravated by the loss of a cash flow producing key person.
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