Generally, premiums incurred by a company in taking up an insurance policy on the life of a key personnel of the company (commonly referred to as “keyman” insurance) against loss of profits arising from the demise of the insured, the premiums are tax deductible.
The following are the requirements that must be satisfied before the deduction of insurance premiums on the “keyman” policy can be allowed.
- The insured must be a “key” person associated with the business of the employer. He must possess special qualifications that are of irreplaceable value to the company and are critical in bringing in the profits such that his death would result in a significant loss of profits in the company. Professional qualifications, special abilities, personnel connections, business acumen and experience may qualify as “special qualifications”.
- The purpose of the insurance policy must be to insure the company against loss of profits arising from the demise of the “keyman” insured.
- The capital sum insured must be directly related to the profits attributable to the services of the “keyman” and is usually limited by the quantum of annual profits attributable to the “key” person in his capacity as the one having prime responsibility for the profitability of the company. In addition, the insurance policy must remain the property of the company and no assignment of the benefits should be made to the insured or to the insured’s family.
- The insurance policy does not provide for a cash surrender or investment value.
Any insurance recovery will be regarded as trading/taxable receipts if the insurance premiums paid qualify under the above conditions.
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