Keyman Insurance Malaysia: Calculation, Pricing & Tax

What is Keyman Insurance Policy?

Keyman insurance is simply life insurance that a company buys to cover the life of a top executive or an employee considered critical to the business because he/she contributes greatly to the survival and profitability of a business.

These terms are also used interchangeably to refer to the same thing – “key person insurance,” “key woman insurance,” and “business life insurance.”

What is the purpose of Keyman Insurance Malaysia?

Keyman insurance Malaysia is intended wholly and exclusively to recoup the potential of loss of business income due to these predicaments occurring to a key-person staff.

• Death
• Critical illness
• Partial temporary disability due to injury
• Total permanent disability due to accident
• Coma

It ensures business continuity by protecting the business from financial losses resulting from personnel attrition leading to operational disruption and various unforeseen consequences.

Keyman insurance can also be structured to support the key person financially during his/her medical treatment and illness recovery.

Benefits of Keyman Insurance Malaysia

A keyman insurance Malaysia is used to increase the odds of cash flow continuity for the company when an important key revenue generator for the company is disabled or passes away.

It is to prevent a company from enteirng a ‘going concern’ state.

How Keyman Insurance Works?

When an employer buys a keyman policy to insure the key person, the company pays the premium costs. The insured key person will not have to pay for the keyman policy premium.

If the insured key person dies, then the employer will receive the death benefit.

Why Keyman insurance is Important?

With keyman insurance monetary payout, it provides a financial safety net when the unprecedented loss of a keyman profoundly and adversely affects the company’s operations or profitability.

The company can utilize the money to sustain daily operations in the absence of revenue, pay off debts, distribute money to investors, and whatnot.

In other scenarios, the proceeds from the keyman policy are often used to cover the costs of recruiting, hiring, and training a new hire to replace the deceased key person.

In summary, keyman insurance essentially buys the company time to find a new person or to implement other strategies to save (or wind up) the business in an orderly manner, instead of immediate bankruptcy or facing going concerns.

How much Keyman Insurance do I need?

That depends on what you need to insure against. Here are the typical scenarios:

• Substitute loss of revenue: Businesses can use the keyman insurance benefit payout to pay its creditors.
• Protect shareholders and partnership interests: This enables the business to buy out the deceased’s keyman financial shares and interests.
• Settle business loans or banking facilities. The keyman insurance payout closely matches value of the keyman personal guarantee or liabilities in this case.

How is Keyman Insurance calculated?

The first step is to determine who is indispensable or irreplaceable in the short term.

In other words, without this key person, business profitability can come to a total stop because a replacement person is impossible to find in the next 12 months.

The company is to estimate quantifiable business revenue loss due to the absence of this key person. Then, this translates into the keyman insurance coverage amount required.

How much does Keyman Insurance cost

Just like any life insurance, the premium cost is calculated based on the coverage amount needed, on top of the age, health condition and gender of the key person being insured. Insurer underwriters will compute the premium payment required based on these inputs.

Bear in mind of these intangible impacts that a keyman brings to the business:

• Goodwill for the business
• Sales of products and services
• Bill collection
• Keyman network, experience, knowledge, and skills.

Who owns Keyman Insurance?

The rightful owner of the insurance proceeds of a “key-man” insurance must remain with the employer or company and the proceeds must not be payable to the “key-person” or his family as stated in Inland Revenue Board of Malaysia (IRBM) Public Ruling No. 2/2003.

In other words, business is the beneficiary of the policy. For example, in the event of the keyman’s death, the business receives the keyman life policy’s death benefit.

Who sells Keyman Insurance Malaysia?

• AIA Bhd,
• Allianz Life Insurance,
• AmMetLife Insurance,
• Etiqa Life Insurance,
• FWD Insurance,
• Great Eastern Life,
• Hong Leong Assurance,
• Manulife Insurance,
• MCIS Insurance,
• Prudential Assurance Malaysia,
• Sun Life Assurance,
• Tokio Marine Life Insurance,
• Zurich Life Insurance

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Are Keyman Insurance proceeds taxable / Is Keyman Insurance taxable?

If the keyman insurance type is an accident or term policy without investment elements, then the premiums paid is allowed to be deducted as business expense.

The payout proceeds will be taxable though because the premiums were tax deductible earlier.

If the keyman insurance type is an investment-linked policy or whole life policy, the premiums paid cannot be deducted as an business expense.. The payout proceeds later will be taxable.

When is Keyman Insurance tax deductible?

See ‘Is keyman insurance Malaysia tax deductible?’ below

Is Keyman Insurance tax deductible?

This explains keyman insurance tax treatment in Malaysia.

A traditional whole-life policy or an investment-linked policy possesses elements of investment, so they can be regarded as capital assets of a company.

These policies comes with withdrawable cash values after being in force for a few years.
For an endowment policy, there is a guaranteed lump sum that is payable upon the maturity of the policy.

Hence, the premiums payable on these types of insurance policies are not allowable as a deduction in arriving at the adjusted income from a business of a company.

Is Keyman Insurance a business expense?

It depends on the type of insurance policy used as keyman insurance. See ‘Are keyman insurance proceeds taxable / Is keyman insurance taxable’

Are Keyman Policies Tax Deductible?

Term life and accident policies have no element of investment.

Furthermore, these policies expire at the end of the insured period and there is no recoup on the premium paid if the insured person does not trigger a claim event

Therefore, all premiums payable on a term life policy or an accident policy of keyman insurance is allowable as a deduction against gross income for a business. 

Is Keyman Insurance payout taxable?

The insurance payout received will be taxable to the employer or company when the corresponding insurance premium paid has been allowed for a tax deduction.

Is Keyman Insurance tax-deductible in Malaysia?

Keyman insurance is tax-deductible in Malaysia provided that:

• The insurance has zero element of investment (no accumulated cash value);
• It expires at the end of the insured duration
• The keyman insurance Malaysia is taken on the life of a “key-person” whose absence would result in adverse financial impact to the employer or company
• The employer or company is the beneficiary of the keyman insurance policy,
• The keyman insurance payout proceeds remain with the employer or company
• The insured “key person” is not a shareholder.  

Keyman Insurance for business owner

Paragraph 7 of Public ruling 2/2003 Key man insurance – In the case of a controlled company, the 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 could be other purposes for the purchase of the insurance policy, such as individual interest rather than company interest.

For example, other than mitigating the risks of loss of business revenue, it is also possible to the advantage of the business owners in their capacity as shareholders of the company.

Similarly, premium paid on a keyman insurance policy on the life of a partner or sole proprietor is not allowable

Keyman insurance vs employer employee insurance

If an employer pays the annual insurance premium for an insurance scheme in which the employee’s family member is appointed as the beneficiary to the policy, the amount of the 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, hospitalization or accident are not usually treated as perquisites.

Keyman insurance vs. life insurance

Keyman insurance Malaysia is not a different type of insurance compared to your usual life insurance. In fact, it is actually a typical personal life insurance, with these 2 differences

Instead of the insured individual paying the premium, the employer pays the premium.

Instead of the insured individual’s spouse/children/parents being the beneficiaries, the employer is the beneficiary.

Common Mistakes – Keyman Insurance Malaysia

As a licensed financial advisor, I have encountered insurance policies being “mis-sold” to business owners using 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 dies or permanently disabled.

The beneficiary of keyman insurance policy is always the company, NOT the 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?

If 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.

Of course, you can continue doing this but it is not in compliant with the tax laws and there will be tax implications when LHDN audits you.

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

• Term Life – cheap, not cash value
• 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
• Endowment policy – when you have deep pockets

Second, on taxation/accounting side – 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.

So now, if you are business owner, before you buy into any so called Keyman Insurance Malaysia – 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.

Your question: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 Lembaga Hasil Dalam Negeri public ruling?

Watch the video below for my visual explanation

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

Keyman Insurance Tax Deductible Malaysia

Boss Boleh – Keyman Insurance