The taxation treatment of keyman insurance depends on whether the key person policy is for a capital or revenue purpose. It is necessary to establish the intent when the policy was taken out (and any change of purpose during the life of the policy) and the purpose for which the policy proceeds are actually used.
A key man policy can also be used as an employee benefit, since the life insurance policy can be transferred to the executive or insured employee by the company. Though key person life insurance premiums aren’t tax deductible, the proceeds of the policy are usually provided to the company free of income tax.
Key man life insurance is a common form of corporate-owned life insurance (COLI). It’s also commonly known as key employee insurance or key person insurance. What Is The Purpose Of Key Person Insurance? The purpose of key person insurance is to protect your company if one of your foremost employees—known as a \'key person\' in the policy—dies.
As the purpose of the key person insurance is capital in nature, the insurance premiums are not tax deductible. Any insurance proceeds paid due to death or TPD do not attract income tax.