The tax treatment of insurance policies seems to be a frequently asked question as there are so many types of insurances and the treatment depends on many factors.
IRD has recently released QB 17/06 that sets out how they expect key person insurance policies to be treated for tax purposes. This also extends to policies that cover total permanent disability, personal sickness and accident (“disablement policies”).
The QB covers the following situations where:
- the policy holder and recipient of the claim amount is a business that employs staff;
- the premiums are paid by the business;
- the insured person is an employee of the business (“the key-person”);
- the employee has no enforceable or implied right against the employer to receive the claim or part of the claim; and
- the policy is taken out to compensate for a loss of business profits resulting from the death/incapacitation of the key person
In this case the payment is considered taxable business income under CB 1. The premiums are also considered tax deductible.
If you have taken out a key person policy this QB is worth a read. Given that this QB is fact specific it is always important to be mindful about the fine print.