Keyman Insurance Singapore

What is Keyman Insurance in Singapore?

Keyman insurance in Singapore is regarded by many business organizations today as part of their business succession strategies to compensate for any possible losses to the business. Some also called it as keyman protection. This is to compensate for any possible losses to the business in the event the loss of the keyman of the business. 

Who is considered the keyman in the Business?

The keyman in the business is someone who has the main responsibility to bring profit to the business. In most business, they are your Chief executive officer, Sales directors, Project specialists. It can also be in term of professional partnerships between doctors, dentists, and accountant. 

The contributions/responsibilities of the keyman can be in forms of:

1. The main person who is responsible for the profitability of the business.
2. The main person who is accountable for the majority off the sales
3. The main person who set the direction and management of the business

IS Keyman insurance tax deductible?  

Tax deduction for premium paid for the keyman polices are allowed on the basis that the policy is purchased to compensate the company for the loss of the keyman. There are few conditions to be met in order the tax deduction to be allowed.

Proof of the insured to be the keyman and for the sum assuring the keyman is required as they might reflect with proportion to the annual profits of the business that the keyman is contributing. 

 As a general rule, it will be necessary for the company claiming the deduction to show that the key person who is insured has special qualifications which have been effective in generating the company’s business. Hence without the services of that person, the business will be substantially affected. Special qualifications in this context need not necessarily be limited to his academic and professional qualifications. It can include other abilities such as the person’s business acumen or simply his business connections that are pivotal in bringing in profits for the company.

IRAS Deductibility of keyman insurance premiums

IRAS provides guidelines in relation to the deductibility of premiums which a company pays to insure their keyman (refer IRAS e-Tax Guide “Deductibility of “Keyman” Insurance Premiums”, published on 29 Jun 2012). In general, to understand the rationale when IRAS would allow the deductibility of premiums, the principles behind the income tax law need to be understood:

Accordingly, when the company purchases keyman insurance and is the beneficiary of the policy, the premiums incurred would not ordinarily be deductible because the expense is not incurred in the production of income but rather to acquire a capital asset (the insurance policy).  The allowance of deductions of premiums paid by the company for keyman insurance is, therefore, the exception to the above rules. Hence IRAS stipulates that the five conditions as summarized in the table below must all be met in order for the deductibility of premiums paid on a keyman insurance policy.

Table to Illustrate the Five Conditions When Premiums for Keyman Insurance Are Deductible (Taken from IRAS website) 

Conditions for Premium Deductibility	Explanations
1. The purpose of the policy is to insure the business against loss of profits arising from the death or disability of a keyman.	The keyman must be someone who has the prime responsibility for the profitability of the business. The premiums in providing protection against loss of profits from the death or disability of the keyman must be wholly and exclusively incurred in producing the income of the business or trade.
2. The capital sum insured is directly related to the extent of the annual profits directly attributable to the services of the keyman. Reference is to be made to the responsibilities of the keyman in the operations of the business. The responsibility could be prime, shared, or contributory.	Usually the capital sum assured is limited by the amount of profits attributable to the keyman in his capacity as the one having the prime responsibility for the profitability of the business. Hence, m cases where the capital sum assured exceeds the annual profits of the business, the premiums will not be deductible as they are considered as not wholly and exclusively incurred in the production of income.
3. The insurance policy remains the property of the business, and there must not be any assignment of the benefits under the policy to the insured or his family.	Tax deductions on the premiums may be denied if the facts show that the benefit of the policy accrues to the keyman in his personal capacity. This is because the premiums paid under such circumstances will not be wholly and exclusively incurred in the production of income. This may happen in cases where the business is substantially owned by the keyman whether on his own, or jointly with his relatives. For example, where the keyman is the sole proprietor of a business or where the keyman owns a substantial share of a company together with his relatives. Whether the benefits of the insurance policy have accrued to the keyman in his personal capacity is determined based on the facts of each case.
4. The insurance policy does not provide for a cash surrender or investment value.	Where the policy provides for a cash value or an investment value, the premiums would not be considered as incurred wholly and exclusively to protect against the loss of profits. This is because the investment payout under the policy will be made to the business even if the event which the insurance coverage is taken for does not occur (i.e., the death or disability of the keyman). Therefore, the premiums of such policies do not qualify for tax deduction, regardless of the type of insurance such a policy is classified under (e.g. life insurance, Endowment insurance, crisis cover plus, group personal insurance, etc.).
5. The loss of the “keyman” does not affect the business’ entire profit-making structure.	Where the insured keyman’s death or disability affects the business’ entire profit-making structure to the extent that the business can no longer carry on its operations, then the premiums are clearly in respect of the capital structure of the business and not just for the loss of profits. Hence, they are not deductible. An individual sole proprietor is denied tax deductions if the keyman insurance is taken up on his or her own life. This is because the sole proprietorship business is not a separate legal entity from the sole proprietor and thus, the death or disability of the sole proprietor will affect the entire profit-making structure of the business. However, the sole proprietor will be entitled to tax deductions if the keyman insurance is taken up on his or her employee provided that all other conditions are met.

What is the difference between keyman insurance and personal insurance?

The main difference is where are the proceeds going to. For keyman insurance, it goes to the company as it protects the company’s financial interest and ensures its survivorship. The proceeds serve as a form of cashflow injected into the company after the loss of the keyman and enhance its liquidity position. 

As for personal insurance, the proceeds go to the life insured’s family or estate. In the Singapore context, and proceeds of the personal insurance is claimable after the probate process.

The premium for the keyman insurance can be used to qualify for tax relief if the conditions mentioned above set by IRAS are met. 

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