Keyman Insurance

Substantial number of life insurance policies had been incorrectly sold as Keyman Insurance to business owner especially to the SME.  This so-called “Keyman Insurance” is not in compliance with Inland Revenue Board (IRB) guideline (IRB Public Ruling 2/2003).

Business Owner

If you are a business owner and/or majority shareholder of a company, is obvious that you are the “key person” or keyman to your business. Unfortunately – this definition does not apply to “Keyman Insurance” under the life insurance industry.

Keyman Insurance

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 is totally & permanently disabled. The beneficiary of keyman insurance policy is always the company (not the family member(s) of the keyman.

A simple test on the validity of Keyman Insurance is to focus on the beneficiary of the keyman insurance policy? If the beneficiary is the keyman’s family members, then it is not a keyman insurance! It is a normal life insurance policy.

Business owner will defend this and claimed that the premiums are paid by the company (not from the business owner’s pocket). Practically, a business owner can do this but it is not in compliance with the tax laws and there could be implications when IRB audits you.

Type of Insurance

The insurance plan that is suitable to implement keyman insurance and in compliance with IRD is as follows:-

• Term Life Policy
• Personal Accident Policy
• Investment-linked Policy
• Whole Life Policy
• Endowment Policy

Allowable Expense

Premiums of Keyman insurance is allowable based on the following IRD Guidelines.

           Term life and PA policy

           Term Life and PA policy have zero (or almost zero) element of savings (zero or         
           almost zero cash value at the end of the policy duration. Therefore the premiums
           paid are allowable deductions (allowable expenses) for the company.

Investment-linked, Whole Life & Endowment Policy

           Investment-linked, Whole Life & Endowment Policy have cash value, cash surrender
           value & maturity value. The premiums that are paid for protection is an allowable  
           deduction. The balance of premium paid that attracts cash values is not an allowable
           deductions (allowable expenses) for the company.

Taxation On Life Insurance Proceeds

The tax application on the life insurance proceeds (surrender cash value, maturity value etc) depends on the life insurance plans and the allowable deduction.  A simple guide is

Allowable Deductions

           If the company claim the premiums as an allowable deductions – then the proceed is
           income taxable to the company

Not Allowable Deduction

           If the company does not claim the premiums as an allowable deductions – then the    
           proceed is not income taxable to the company


Perquisite
A perquisite is a payment or profit received in addition to a regular wage or salary, especially a benefit expected as one's due (example, a tip, gratuity, use of company car, telephone, entertainment etc. All perquisite provided by the company is treated as income taxable item to an individual.

perquisite is exists when an insurance premiums are paid by the company to insure the life of keyman of the company (business owner, shareholder, director) and the beneficiary is the family members of the the keyman.

Allowable Deductions Under Individual Income Tax

Annual allowable deductions for individual under current IRD guidelines:-
1: RM6,000 (EPF and Life Insurance premiums combined)
2: RM3,000 Medical insurance & Children Education insurance Policy
3: RM3,00 Annuity plan
4: RM3,000 Private Retirement Fund

 

Gratuity Payment
A company receives insurance proceeds from insurer in the event a keyman suffers premature death. The company may decide to make a gratuity payment to the beneficiary of the keyman. The treatment for tax on the gratuity payment depends on the following:-  

No Contractual Agreement

          Gratuity payment to beneficiary is generally free from if there is no prior contractual     
          agreement (employment) prior to keyman’s death (Paragraph 14 of Schedule 6of the
          ITA 1967)

Contractual Agreement

           Gratuity payment to beneficiary is generally subject to tax if there is prior contractual
           agreement (employment) prior to keyman’s death. However, IRD normally does not
           seek to tax under this circumstance.