Life Life assurance policy paid through ltd company - is this setup valid?

[mazz]

Hi there,

I'm looking for opinions on our current life assurance setup please - I'm starting to wonder if it is a bit iffy...

We have a limited company. I'm a proprietary director with all the shares and both my partner and myself are set up as the only employees of it.

A dual life assurance policy covering both our lives has been setup. The company owns it, is the sole beneficiary of it and pays the premium. The only reason it was setup this way was to write the premium off as a company expense.

We got tax advice - admittedly a bit informal, but from a tax advisor - who came up with the above approach. He said, in the event of a death:

- the insurance company would pay our company the insured amount.
- our company would make an ex-gratia payment to the deceased's estate of that amount.
- our company would write off this payment as an expense.
- the payment would then go to the deceased's estate for distribution, implication being tax-free though no actually stated.

Since then, I've had to delve into this a bit futher and am feeling shaky on it, as:

1) No mention was made of us paying BIK on the premium value which we are getting the benefit of the company covering. I believe health insurance premiums are subjec to BIK, so I'd assume this is the same.

2) I'm wondering if the pay-out from the company to the deceased estate would not be subject to tax (even PAYE / PRSI?) in some way. I don't know if the grave puts one beyond certain taxes...

I guess there may be a connection between the two points and perhaps if one were to pay CGT on the premium, then one might get any payout tax-free. But that kinda defeats the whole purpose of the approach!

I'd be very grateful for any opinions as clearly don't want to take chances on these things just to save a reasonably modest amount each month.

Thanks in advance and sorry for the long post!

Mazz

PS Feel free to move this post if it is more a tax than insurance issue!

 

[leroy67]

My understanding would be that as the company pays the premium it will also receive the benefits. Any subsequent withdrawal of this sum would then become liable for income tax.

 

[Baracuda]

Pretty much all of what your tax advisor said is correct if the policy was set up under a pension arrangement where the company can set up life cover for you up to the value of 4 x salary, as advised there is no BIK to the emplolyee and the company can get full tax relief on the premiums and the benefits are paid out tax free however the beneficiary's of the estate may have to pay inheritance tax

However you said that this policy is set up on a dual life basis which leads me to believe that you have probably taken out Key-Man Cover. In this case the company is the owner of the policy and benefits of the policy and therefore maybe liable for tax such as capital gains, income tax etc when distributed to your estate by the company.

 

[LDFerguson]

As Baracuda says, this sounds like a Key Man policy of sorts. But the purpose of a Key Man policy is supposed to be to compensate the company for loss of the services of a key employee, NOT to provide the individual's estate with cash on death. In the event of death, the claim would be paid to the company and if the company subsequently passes on the proceeds to the deceased's estate it would be taxable like any other distribution from company funds to the deceased's estate.

If the intention was to provide cover for the directors' families, a Death in Service scheme would be neater - company pays premium, claims is paid to trustees, trustees distribute to estate. A lump sum of up to 4 x annual salary (including any occupational pension funds of the director from this employment) can be paid tax-free. Anything more than that must be taken as a dependant's pension, which is taxable.