The Gross Mistake Business Owner Made on Keyman Insurance

If you are a business owner, you are naturally the “key person” or keyman to your business. But that is NOT how keyman insurance is used. In the market, I’ve encountered insurance policies being “mis-sold” to business owners, specially SMEs,  with the concept of “keyman insurance” but it is not in compliant with Inland Revenue Board (IRB) guideline (IRB Public Ruling 2/2003). Let me explain.

The keyman insurance is meant to protect a key employee in a company, against the loss of profit suffered by a company in case the key employee, well, dies or permanently disabled. The beneficiary of keyman insurance policy is always the company, NOT they keyman’s family. So a simple test, what I call, a Keyman Test, is to ask business owner – who are the beneficiaries of your keyman policy?

keyman insurance 2If it is his/her family members, then it is NOT a keyman insurance! It is a normal life insurance policy. But very often, business owner will also said the premiums are paid out of company profit, not his own pocket. Well I said, you can do this but it is not in compliant with the tax laws and there could be implications when IRB audits you.

First, we want to talk about the most suitable type of insurance to implement keyman insurance.

  • Term Life – cheap but ensure the coverage term is sufficient
  • Personal Accident Policy (PA) – cheap but coverage limited to payout due to accidental event (no payout due to natural death or illnesses)
  • Whole Life and Investment Linked Policy – not cheap but do-able, but must be handled differently compared to Term Life or PA when it comes to allowable expenses/taxability of proceeds (see below)
  • Endowment – you’ll be dumb if you use this to implement keyman insurance because you’ll be bleeding paying for the super high premiums

Watch the video below for my explanation graphically

Second, on taxation/accounting side – we want to talk about the premiums paid on keyman insurance as allowable deduction against gross income from business.

  • Term life and PA policy have zero element of investment, hence zero cash value at the end of the policy duration. Therefore the premiums paid are allowable deductions against business income
  • For the rest, they have either cash value or surrender/maturity value, so the premiums paid are NOT allowable deductions

Third, on the taxability of the proceeds (payout) -whether it is surrender/matures/payout.

  • Term and PA – the proceeds are taxable on the company since it has been allowed as deduction as business income
  • The rest – proceeds are NOT taxable on the company premiums paid has been disallowed

Now business owner may argue that this is perfectly legal as premiums paid on their keyman insurance is one of the “benefit” as since they are also a Director/staff in their company and they draw a salary every month from business.

If this is the case, then we are not talking about keyman insurance anymore. In fact, it is out of the question. We are talking about premiums paid by company on your life insurance policy as a perquisite provided by the company. Perquisite is one of employment benefit which is fully taxable. What is perquisite? See HERE

So now, if you are business owner, before you buy into any so called Keyman Insurance – do this what I called The Concern Test. Do you want an insurance to protect your family or your business?

Most business owners would want to protect their family, not their business when they die/disabled. Of course they want to protect their business, but that’s another aspect of business succession planning, not keyman insurance related.

Another question is – if I already bought a “keyman insurance” but I don’t know how to check what kind of policies I bought or how do I fix this so be compliant with IRB ruling?

keyman insurance

I’ll recommend you to drop your contact below for consultation

Competent Financial Advisers know the Tax Laws too on top of everything else.

9 thoughts on “The Gross Mistake Business Owner Made on Keyman Insurance”

  1. Hi there. I am Insurance Agent. I have a read a few articles about Keyman Insurance and what I understand, only Term Life or PA can be allow for company tax deductible. For any policies which only have surrender value, we can’t call it Keyman Insurance that allow for tax deductible as well. Does it correct?

  2. Hi. Is this applicable to enterprise company who has staff that control almost the company daily operation activities. If something happen to him, company might need to collapse or wind up.

    Can the owner (sole proprietor) take keyman insurance for this staff?

    1. Think you might be confused.
      Keyman insurance is the purpose an insurance policy is used for.
      Investment linked policy is referring to one of the type of insurance structure.
      Whether or not it has tax benefit depends on what type of insurance you are using to structure the keyman policy.

  3. Hi I would like to know if I can use my Investment Linked Life Insurance Policy as Keyman Policy since it has cash value

    1. not sure what you mean by that or why having cash value in your investment linked insurance policy qualify it to be used as keyman policy?

    1. Hi Lenggesh, are you a business owner who want to understand how to reduce company tax using keyman insurance?

Leave a Reply

Your email address will not be published. Required fields are marked *