Keyman insurance is a business insurance.
Key person insurance is a life insurance policy that a company purchases in the life of an owner, a top executive, or another individual considered critical to the business. The company is the beneficiary of the policy and pays the premiums. This type of life insurance is also known as "key man (or "keyman") insurance," "key woman insurance," and "business life insurance."?
#keymanagement or key man insurance is a business insurance. A key man insurance is used to ensure continuity of cash flow for the business. In the event a key man, key person or important key revenue earner for the company is disabled or dies.?
?The keyman #insurance tax deductible is governed by the income tax laws of Malaysia.??
?A keyman or key man or key person could be a key employee, shareholder or owner of the business or company. In the event an unfortunate incident happens, such as an accident or disease, resulting in death or permanent disability of the person, the business will be severely impacted from possible drops in revenues or income.?
?Keyman insurance offers a financial cushion if the sudden loss of a certain individual would profoundly negatively affect the company's operations. The death benefit essentially buys the company time to find a new person or to implement other strategies to save (or shut down) the business.???
The company will be paying the premiums for this risk, the key man risk insurance policy. And the beneficiary is the company.?
?There are other tax implications. If the keyman insurance is an accident or term insurance, then the premium paid is allowed to be deducted as an expense. Do note that there must be zero investment elements in these policies. However, the proceeds will be taxable because the premiums were deductible earlier?
?If the keyman insurance is whole life or investment-linked insurance policy, the premium paid cannot be deducted as an expense. This is because there is an element of investment, and it is treated as an asset. The proceeds will not be taxable.?
?Keyman insurance is insurance to protect a small business usually. The insurance gives the company cover for the short-term loss or impact.? So, the coverage depends on how much the calculated business loss is.? Or how much you want to be covered for.? The underwriting process will then depend on the premium payment required.?
In a small business, the key person is usually the owner, the founders, or perhaps a key employee or two. The main qualifying point is whether the person's absence would cause major financial harm to the company. If this is the case, key person insurance is worth considering.?
To determine whether a business needs this kind of coverage, company leaders must consider who is irreplaceable in the short term. In many small businesses, it's the owner who does most things, such as keeping the books, managing employees, handling key customers, etc. Without this person, the business can come to a stop.?
For key person insurance, a company purchases a life insurance policy on certain employee(s), pays the premiums, and is the beneficiary of the policy. In the event of the person's death, the company receives the policy's death benefit.?
That money can be used to cover the costs of recruiting, hiring, and training a replacement for the deceased person. If the company doesn't believe it can continue operations, it can use the money to pay off debts, distribute money to investors, provide severance benefits to employees, and close the business down in an orderly manner. Key person insurance gives the company some options other than immediate bankruptcy.?
?It must be borne in mind what the keyman brings to the business and company:?
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Key person insurance can cover a company against a range of risks. For example, it may provide:?
The insurance premium is potentially tax deductible against the gross income of the business. According to Income Tax Act 1967 Section 33(1), where the expenses are wholly and exclusively incurred in the production of income is allowable as a tax deduction. These may include car insurance, fire insurance, term loan insurance etc. Insurance paid on behalf of employees. It is Tax deductible as long as for business purpose.?
?If an employer pays the annual insurance premium for an insurance scheme in which the employee’s relative is appointed as the beneficiary to the policy, the amount of annual premium is a perquisite to the employee and shall reported in employee Form EA.?
?However, group insurance premiums to cover workers in the event of an injury or accident, airline Travel Insurance for employees for coverage of employees for travelling on official duty are not treatment as perquisite.?
?The premium on the policy is deductible if the insurance has no element of investment and the insurance is taken on the life of a “keyperson” whose absence would result in a reduction in the profits of the employer or the company according to PR 2/2003 “Key-man” Insurance.?
?Section 33(1) of Income Tax Act 1967 - Wholly and exclusively incurred in the production of income No.11 of Dialogue between LHDN and CTIM on 25.03.2015 - Expenses incurred on Public Liability and Money-In-Transit Policy can be allowed as deduction if the taxpayer’s business is constantly under potential risks. For example, a Karate expert training his students faces risks of injuries.?
?Paragraph 5.2 of Public ruling 2/2003 Key man insurance - 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 if the policies that have no element of investment and at the end of the insured period there is no return on the premium paid if the insured person lives or is not injured.?
Paragraph 5.3 of Public ruling 2/2003 Key man insurance - A whole life policy and an endowment policy have elements of investment and are therefore regarded as capital assets of a company. So, it is not allowable to arrive at the adjusted income from the business of a company.?
Paragraph 7 of Public ruling 2/2003 Key man insurance - In the case of a controlled company, 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 as there are other motives for the purchase of the insurance policy.?
Other than providing cover for the risk of loss of business income, it is also for the advantage of the director or employee in their capacity as shareholders of the company. Similarly, premium paid on “key-man” insurance policy on the life of a partner or sole-proprietor is not allowable.?
Paragraph 8.2 of the Public Ruling 12 Year 2018 :? Income from Letting of Real Property - The direct expenses which are wholly and exclusively in the production of income under subsection 33(1) of ITA 1967 are deductible for the income of letting of real property under paragraph 4(d) of ITA 1967. Example: assessment and quit rent, interest on loan, fire insurance premium, repair and maintenance and etc.?
Paragraph 7.3 of Public Ruling No 1 Year 2019 : Professional Indemnity Insurance - The PII premium incurred by a company are allowed for deduction against the gross income of the company if the company allowed the employee to perform the profession and the company are carries on the business related to that profession.??
The insurance premium is potentially tax deductible against the gross income of the business.??