Key Person Insurance

One of the most important assets of a business are its people. 

One of the most-often overlooked “assets” of a business are their people – their knowledge, skill, experience, creativity and leadership – all of which enable a business to grow and prosper. Key employees that possess these values are the assets upon which the profitability of a business depends.

Just about every business has one or more individuals whose capital investment, knowledge or business connections make them essential to the continued success of the business.

Is Key Person Insurance tax deductible?

The tax treatment of key person insurance depends on whether it is for revenue or capital purposes*.

Where the policy is for revenue purposes the insurance premium will be an allowable deduction for the business, but the proceeds will be assessable income to the business.

Where the policy is for capital purposes the insurance premium will not be an allowable deduction for the business, but the insurance proceeds will not be assessable income to the business.

Example of Revenue Purpose (premium tax deductible) 

• Compensation for fall in revenue/sales/profit.
• Cost to locate, recruit and train a full time replacement.
• Cost of a temporary replacement until a full time replacement can be recruited.
• Compensation for bad debts resulting from the loss of a key person.

Example of Capital purpose (premium not deductible) 

• Repaying the estate of a deceased key person for loans made by the deceased key person to the business.
• Repaying other debts called in because of the loss of the key person.
• Replacing the value of goodwill lost because a key person is no longer there.
• Replacing lines of credit guaranteed by the key person.

*For full information about the tax implications of key person insurance, refer to the Australian Taxation Office Ruling 155.

Want to know more about Key Person Insurance? Call us on (03) 9890 3388 to book an obligation-free appointment, or get a free online quote now.

The information contained in this outline is of a general nature only. It has been prepared without taking into account any individual's objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness having regard to your own objectives, financial situation and needs.