Taxation of Key Man Life Insurance

A few years ago, one of the best and reputable restaurants in Melbourne faced a serious problem that almost led to its closure. One of its key persons, the head chef, unexpectedly died in a car accident. Luckily, the business took out key man insurance that helped the person left in charge cover the financial difficulty and find a qualified replacement immediately. If it weren’t for the insurance policy, the business would probably never make it.

How about you? Do you know what to do in case one of your key employees gets sick or suddenly dies? Do you have enough funds to cover your company expenses or skill to continue the job that this person left? If you’re running a business, purchasing insurance policies, such as key man insurance, is something that you should consider. This is particularly true if you’re a start-up, since you probably have limited financial resources and cannot hire several employees yet, who can cover the jobs of the others.

key person insurance taxation

But what is key man insurance and how does it work?

Key man insurance is a type of life insurance that is designed to help businesses survive in case of the loss of its key employees. Just like other types of insurance, you pay premiums for key man insurance; and in the event of the unexpected illness or sudden death of your key employees, your company will receive benefits that can be used to continue its operation, such as paying off debt, providing employee benefits, hiring and training a replacement, and getting more resources to help your company gets back on its feet. The benefits that you will get depend upon the policy.

How about the cost and tax treatment of the policy?

When it comes to purchasing insurance, the two of the primary concerns of buyers are its cost and taxes. The cost of key man insurance policy varies, depending on your business and how much it would need in case something happens. You can ask different insurance companies for quotes in order to know your options and understand more about their terms.

As for the tax, the key man insurance has both tax-deductible and non tax-deductible features. Whether your insurance is tax deductible or tax payable depends upon the structure of your policy and the purpose of your purchase. This is the very reason why people are advised to clarify their reason when purchasing such policy, as this will affect the keyman life insurance tax treatment. Usually, the key man insurance used for revenue purposes, such as for replacing lost income and finding replacement, are tax deductible. If you use it for capital purposes, such as paying off debt and loan, the premiums paid are usually not tax deductible.

The taxation of premiums and benefits of key man insurance is very complex and really requires the help of a professional to understand better. The taxation treatment may differ depending on you (as the owner or buyer), the reason for the purchase, your relationship to the insured, and many other conditions surrounding the purchase. If you really want to get more information and determine how this policy will benefit you and your business, talk to an insurance agent or tax professional.