Keyman Insurance

The tax treatment of what is generally known as “keyman” insurance is a topic which gives rise to regular enquiry. Keyman insurance is essentially insurance taken out by an employer in his/her own favour against the death, sickness or injury of an employee (the keyman) whose services are vital to the success of the employer.s business.

In practice, the term keyman insurance may be used to refer to a range of policies not all of which give rise to admissible tax deductions/assessable receipts. The tax treatment of premiums paid and of sums received under any policy depends on the exact terms of the policy rather than on any description which an insurance company may attribute to it.

In general, premiums paid under policies insuring against loss of profit consequent upon certain contingencies will be treated as admissible deductions for tax purposes in the periods in which terms? are payable. Equally, all sums received by an employer under such policies will be treated as trading receipts for the period in which received. Policies, covering such contingencies as sickness, accident or death of an employee, which may qualify under this heading are those where -

1. the sole relationship is that of employer and employee
2. the employee has not substantial proprietary interest in the business,
3. the insurance is intended to meet loss of profit resulting from the loss of the services of the employee as distinct from the loss of goodwill or other capital loss, and
4. in the case of insurance against death, the policy is a short term insurance providing only for a sum to be paid in the event of the death of the insured within a specified number of years.

In applying the conditions (a) to (d) above the following guidelines are followed:

• Reference to "Employee includes a director
• A person is regarded as having a "substantial proprietary interest" in a company if he or she directly or indirectly owns or is able to control more than 15% of the ordinary share capital of the company.
• The policy must be for a fixed term with no surrender value and no endowment or other investment content; it must not contain provisions whereby benefits could be paid to any person other than the employer
• The insurance must relate to loss of profits only and it will be necessary, if required, to satisfy the inspector of taxes that the contingency insured against will genuinely have an adverse effect on the employer.s business. Premiums on policies taken out to cover loans or other outstanding debts which would become repayable on the death of an employee are ot admissible deductions.
• In general, “short-term” means not exceeding five years. However, in practice, a fixed term policy exceeding five years will be accepted provided that all other conditions are met and the policy cannot extend beyond the employee.s likely period of service with the employer e.g. for the period of the contract of service or to normal retirement age.

Any question as to the allowability as a business expense of premiums paid and the chargeability to tax of any benefits derived from a policy which does not satisfy the above conditions will be determined in accordance with established principles.

While the allowability of a premium or the chargeability of a benefit are strictly separate issues, it will usually be the case that, if the premium is allowable for tax purposes, the benefit is chargeable to tax and, if the premiums are not allowable, the benefit is not chargeable. However, it would not be accepted that a benefit is not chargeable to tax simply because an employer decided not to a claim a tax deduction on the premium.