Tax treatment of business insurance

New Zealand has no special tax code for business insurance. Treatment falls out of ordinary income tax principles, and the question they ask is what the cover is for. If the policy protects the business’s income stream, it sits on revenue account. If it protects or restores capital — a shareholding, a loan repayment — it sits on capital account.

That distinction drives everything else. On revenue account the premium is generally deductible as an expense of earning income, and the proceeds are generally assessable, because they stand in for income that would have been taxed anyway. On capital account the premium is generally not deductible and the proceeds are generally not assessable.

It is a coherent system rather than an arbitrary one. But classification is not always obvious, it depends on facts specific to your business, and it interacts with who owns the policy, who pays and who receives the money. Which is why every serious adviser says the same thing: settle it with a chartered accountant, in writing, before the application is submitted.

Why the same product appears twice

Key person cover appears on both lines, which is the clearest illustration of the principle. Two identical policies on the same life, for the same amount, can be treated entirely differently depending on what the money is for. One replaces profit that would have been taxed. The other repays a loan.

Which is why the paperwork matters. Document the purpose when the cover is arranged — in board minutes, in the application, in the agreement it funds — not years later when a claim is being paid.

Grossing up

If proceeds will be assessable, the business receives the sum insured less the tax on it, so a policy sized to the profit shortfall falls short. The usual response is to gross it up so the after-tax amount matches the need, which increases the premium. Your accountant should give you the multiplier; do not assume one.

Why it cannot be fixed afterwards

Treatment follows the substance of the arrangement as it stands. You cannot recharacterise a policy retrospectively because the treatment turned out unhelpful. The remedy is to cancel it and take out a new one structured correctly, which means fresh underwriting at your current age and health. For someone who has had a health event since, that door may have closed. Hence the sequence: accountant first, application second.

One further point. Where a business pays premiums for cover benefiting an employee rather than the business, the analysis moves into fringe benefit tax and PAYE territory, which runs on different rules again.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Whether each policy’s purpose is documented now, rather than reconstructed at claim time.
• Whether one policy is serving both a revenue and a capital purpose without any split recorded.
• Whether the sum insured has been grossed up where proceeds will be assessable.
• Whether the owner, the premium payer and the intended recipient are consistent with the treatment you are relying on.
• Whether a company paying for a shareholder-employee’s personal cover has considered the FBT questions.
• Whether the treatment has been revisited after any restructure or change of purpose.

Every New Zealand insurer writes business insurance to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• An adviser cannot give tax advice, and one who offers a definitive answer without your accountant is overreaching. A good adviser raises the question early and structures around the accountant’s answer.
• Splitting cover into separate revenue and capital policies is often cleaner than one policy with a documented split.
• Where the sum insured must be grossed up, an adviser can model the premium difference so you see the real cost.
• An adviser can make sure the ownership matches what the accountant and lawyer specified — where these arrangements most often come apart.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.