Key Person Insurance – is it deductible?

Key Person Insurance – is it deductible?

Key Person Insurance is an increasingly popular way to insulate businesses for lost profits if a key member of your team is incapacitated. As you would imagine, business expenses don’t stop in the absence of a key person and revenue can be significantly disrupted.

‘Key People’ tend to be business owners or partners, specialists (such as a designer who is integral to the core product development of the company) or perhaps a salesperson who is responsible for critical customer relationships.

The company takes out an insurance policy on the key person and pays the premiums. If the key person is disabled, suffers a long term illness or dies, the company receives the benefit of the policy – usually an agreed amount.

The Inland Revenue Department recently published a ‘Questions We’ve Been Asked (QWBA)’ exposure draft on Key Person Insurance. This article sets out IRD’s proposed policy and asks for comment by 23 May, 2017. You can read more by clicking here.

Are the Premiums Deductible?

The IRD is proposing that premiums should be a normal deductible business expense. The policy is protecting the income of the business, rather than the individual, so this seems sensible.

What about any Payout?

The IRD is proposing that any recurring sum or lump sum received under the Key Person policy is taxable income for the employer.

Are there any exceptions?

Yes. Where a policy has multiple purposes that might include, for instance, mortgage repayment protection or a capital payment, there may be the need to split, or ‘apportion’ the premium and any subsequent claim.

As with all insurance, deductibility and the question of income all depends on the policy.

If you would like to know more about Key Person Insurance, feel free to contact us. We are also able to refer you to a reputable broker to organise cover for your business.

This article is by its nature general in application. If you require advice that is specific to your situation, we would be very happy to assist you.

Angus is the CEO and founder of Generate Accounting.