If you own a business and are looking to take out business insurance on yourself – or your employees – then today’s article is a must read.
Several changes have been made to the Income Tax Act which has implications for life insurance policies owned in the name of your company.
Let’s look specifically at the so-called ‘key person’ insurance policies.
Key person insurance policies are those where an employer insures itself against the death, disability, or severe illness of a director or an employee.
So what are the tax implications?
If a business takes out life insurance on an employee or director it has two options:
- Claim the monthly contributions as a tax deduction and resulting in the benefit being taxed, or
- Not claim the monthly contributions as a tax deduction and have the benefit pay out tax-free
The business owner has to decide upfront which of these two options he or she prefers. The life insurance policy also needs to make mention of which option is preferred.
The following requirements must be met if you require the premiums to be tax-deductible:
- The owner of the life insurance is insured against loss by death, disability, or severe illness of a director or employee.
- The policy is a pure risk life insurance policy with no cash or surrender value.
- The policy is never the property of anyone else except the business owner at the time of paying the premiums.
- The wording in the policy must state that section 11(w) (ii) of the Income Tax Act is applicable. From 1 March 2012 a clause will be included in the policy wording stating that the contributions will be tax-deductible. If the policy was taken out prior to 1 March 2012, then an addendum must be added to this effect. The decision to add an addendum to a pre-existing life insurance policy must be made before 31 August 2012.
And what if you don’t want the premiums to be tax-deductible?
Then you need to indicate when applying for the life insurance, that you require the policy to be ‘non – conforming’. Once again, if the policy was taken out before 1 March 2012, then failure to indicate whether you require the contributions to be tax-deductible will result in your policy defaulting to the ‘non-conforming’ status.
Now is the perfect time to look at taking out company owned life insurance policies since the new rule has just kicked in…so what are you waiting for then?
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Until next time.
The InsuranceFundi Team