Q:
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What is the meaning of a keyman insurance policy?
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A:
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It regards to an arrangement wherein an employer takes out an insurance policy insuring against loss of profits arising from the death, sickness or injury of a key employee. The beneficiary is the employer. The purpose of taking out the insurance is to compensate the employer for the loss of trading income that may result from the loss of the service of the key employee in case of death, sickness or injury.
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Q:
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What if an employer is a sole proprietor or partnership and the insured person is the sole proprietor or a partner, are the premiums paid by the employer deductible?
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A:
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The Inland Revenue Department (“IRD”) would not accept that it is a real keyman policy. It is because a keyman policy is applicable only in the case of an employer and employee relationship. A sole proprietor or partner is not an employee. The premiums are regarded as private expenses and not deductible.
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Q:
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How about an employer is a limited company and the insured person is a director who owns substantial shares, generally a shareholding of 20%, in the company, are the premiums paid by the employer deductible?
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A:
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The situation is similar to the case wherein the insured keyman is the sole proprietor or a partner. IRD considers the purpose of the policy is to protect the value of the shares because the life or well-being of the director (being the keyman) would significantly affect the value of the shares. Such premiums are capital in nature and not deductible.
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Q:
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If the proceeds of a keyman insurance policy are payable to the family members of the employee, are the premiums paid the employer still deductible?
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A:
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No. Because the said policy is to compensate the employer’s loss of profits but not to protect the family of the employee.
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Q:
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If an employer takes out an insurance policy to cover a compensation to the employee on injury or death under the law, are the premiums paid on such policy deductible?
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A:
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Even though the policy is not a keyman policy, the premiums are deductible as it is considered as normal business expenses.
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FAQ
