Crucial Illness Insurance 07 – Taxation of Critical Illness Policies

Once we mentioned in previous article, essential illness insurance is a type of insurance policy which will pay a lump tax free benefit to the insured in the event that he is diagnosis of one of the critical health problems covered by the policy. The benefit is intended to help insured persons maintain their particular quality of life and financial independence after suffering a life-threatening illness.
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In this article, we will discuss the taxation of critical illness insurance.

Critical Illness policy is considered to be an accident plus sickness policy.

a) If the policyholder, the insured, the payer from the premium and the beneficiary are all exactly the same person, the premium are not tax deductible and the benefits are tax free.

b) In a key individual

If premiums are not deducted because business expenses then the benefit is definitely tax free if the key person insured is designated as the named beneficiary. If the business is the beneficiary of the policy then premium is tax deductible and benefit is taxable.

c) Small business owners purchased critical illness insurance on themselves.

When establishing ownership in a private corporation, a single significant concern is that there is no system similar to the capital dividend account to allow the benefits to be paid out on a tax-free basis to shareholders. As a result, critical illness benefits payable to a personal corporation can only be paid out since either taxable employment income or taxable dividends.

Therefore , it could be significant implications where the critical illness advantage is intended to be used by the shareholders included in a buy/sell arrangement, or to finance personal expenses arising from the important illness.

d) Corporation critical illness insurance

Some employers have incorporated critical illness coverage into an income loss replacement plan If the premiums for such coverage are insurance deductible as a business expense to the employer then the benefit are not taxable to the employee because they are not payable on the periodic basis. If the employee experiences a critical illness, benefits will be paid directly to the employee under the crucial illness policy.

Some insurers are actually offering one policy that includes both critical illness coverage and life insurance coverage. The application is underwritten for both benefits at the time of sale. One superior is paid and it funds all of the benefits under the policy and It makes even more complicated to the taxation of the policy.

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