Businesses often identify, among the staff they employ, those that make a significant contribution to the success of the business. This may be owing to their special skills, knowledge, education, qualifications or experience. Imagine the impact on the business and productivity if any of these staff members suddenly passed away or became disabled.
Keyperson assurance is there to provide protection against the negative effect that the death or disability of such a key employee would have on the business. The insured amount is a calculation of the loss and additional expenses the business will incur in the event of the death or disability of the key employee, and a life policy with death and disability cover is then taken out on the life of the employee.
If the employee passes away, the policy pays out to the business and these funds may then be utilised to source and up-skill a new employee and absorb the loss in productivity until the new employee has acquired the same level of knowledge and skill.
The policy is taken out by the business on the life of the employee, and the premiums are paid by the business. The proceeds are received and utilised by the business so it is an employer-owned policy and tax implications are applicable.
There are three methods available to determine the amount of cover required to make provision for the loss of a key employee:
If the requirements of section 11 (w) of the Income Tax Act are met, ‘conforming policy’ premiums will be tax deductible and the proceeds will be included in the gross income of the employer in terms of paragraph (m) of the definition of gross income.
Conditions of section 11 (w)
If the policy does conform to the requirements of section 11 (w), the total cover required needs to make provision for the income tax amount which will need to be paid when the business receives the policy proceeds.
If the policy does not meet the requirements, it is a ‘non-conforming’ policy, and the premiums paid are not tax deductible in the hands of the business. The proceeds from this policy will not fall into the gross income of the business under paragraph (m).
The proceeds of a keyperson policy will not be deemed to be the property in the deceased’s estate for estate duty purposes if the requirements of section 3 (3) (a) of the Estate Duty Act are met; which are:
The challenge is for business owners is to identify key personnel and to establish the value that these key people add to the business, and then insure against this loss by taking out keyperson insurance on that employee’s life.
I recommend that you chat to your NFB Private Wealth Manager if you are considering risk assurance and business assurance cover.