Insurance on the lives of directors

[USHA]

Hi there

If you have an insurance premium going off your business account and it is basically, each director taking out insurance on the life of the other.

Do you post that as just a company expense or do they each have to have that amount deducted off their salaries?

[Rafael]

Its seems like a buy and sell agreement, it shouldn't be coming off the company's account but the owner of the policies.
If you post it as a company expense there will be tax implications on payout.

Rather allocate it to his salary or his loan account

[Rafael]

Just some extra info below

Payment of premiums:

It is important, from an estate duty perspective, that the life assured does not pay a single premium in respect of the policy on his/her own life. The owners of the policy should pay their share of the premium, pro-rata. Payment of the premiums may come from the businesses bank account, but should either be debited to the individual’s loan account, or debited against the individual’s salary. While technically the business may now pay the premiums directly, this payment does not qualify as a tax deduction and may have other tax implications and so is not ideal or recommended.

The Income tax consequences:

The premiums paid for the life cover are not tax deductible, therefore the proceeds will pay out free of income tax. As long as the policies have not been ceded by the original owner/s to any new owner/s there will be no capital gains tax payable either.

Estate duty consequences:

The proceeds of the life insurance policy will not attract estate, provided that the following requirements are met:

The partners/shareholders/members do not pay the premiums on the policies in their own lives
At the date of the death of the life assured, the parties to the agreement are still partners/shareholders/members
The policy was taken out for the purpose of enabling the partners/shareholders/members to acquire the whole or part of the deceased’s interest in the business

These requirements can be met where a trust or corporate entity is an owner on a life insurance policy, and where the life insured is a business co owner who is a natural person (and not a trust or corporate entity).

However, where the life insured is the trustee of a trust or director of a corporate entity, then the requirements cannot be met and the proceeds of the life insurance policy will potentially attract estate duty. This potential estate duty must be accounted for and the cover effected should be increased to ensure a sufficient after-tax lump sum to purchase the deceased’s business interest.

[USHA]

Thank you so much for your explanation Rafael.