Tax treatment of business-owned insurance

Business insurance covers several different jobs under one heading. Key person cover exists so the business can survive the loss of someone whose contribution drives its income. Shareholder protection exists so the surviving owners can buy out a departing owner’s shares without selling assets. Business debt protection exists so a term loan or an overdraft can be cleared. Business expenses cover keeps the fixed overheads paid while an owner is off work.

Those are not variations on a theme for tax purposes. They fall into two very different categories. Cover that replaces income or profit the business would otherwise have earned looks like revenue. Cover that funds a capital transaction — acquiring shares, repaying principal — looks like capital. New Zealand tax treats those differently, and the same insurance product can be either depending on why it was bought.

The consequence is that the tax outcome is decided when the cover is set up, by the purpose and the paperwork, and not at claim time by how anyone would prefer it to be treated.

Why documentation decides it

If the shareholders’ agreement says the policy funds a buy-out, the policy is owned consistently with that, and the accounting treats the premiums as non-deductible, the story is coherent. If the agreement says one thing, the ownership says another, and someone has been claiming deductions, the position is not what anyone intended. Insurance structures for businesses have to be documented at the time, by people who talk to each other — the adviser, the accountant and the solicitor.

1. 1Decide what the money is actually for. Write it down.
2. 2Choose ownership that matches that purpose — company, shareholders personally, or cross-ownership.
3. 3Make the shareholder or buy-sell agreement say the same thing.
4. 4Confirm the premium treatment with the accountant, in writing, and apply it consistently.
5. 5Review it whenever ownership, debt or the shareholding changes. Business insurance goes stale faster than personal cover.

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

• Whether the shareholders’ agreement and the insurance actually match. They often do not.
• Whether the sum insured still matches the value of the shareholding or the balance of the debt.
• Whether the cover is owned by the company or by the shareholders personally, and why.
• Whether GST, imputation or shareholder current accounts are affected by how proceeds are applied.
• Whether a single policy is being asked to serve two purposes.
• Whether the accountant has actually confirmed the treatment or it has simply been assumed.

Every New Zealand insurer writes business cover 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 starts with what the money is for, which is the question that determines the structure and therefore the tax treatment.
• They will set up separate policies where mixing purposes would create ambiguity.
• They work with the accountant and the business’s solicitor so that the documentation is consistent.
• They review business cover when shareholdings or debt change, which is when structures quietly stop matching reality.

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.