Important Illness Insurance 07 – Taxation of Critical Illness Policies

Once we mentioned in previous article, vital illness insurance is a type of insurance plan which will pay a lump taxes free benefit to the insured when he is diagnosis of one of the critical illnesses covered by the policy. The benefit is supposed to help insured persons maintain their particular quality of life and financial independence after suffering a life-threatening illness. In this post, we will discuss the taxation associated with critical illness insurance.

Critical Disease policy is considered to be an accident and sickness policy.

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

b) In a key person

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

c) Small business owners purchased critical illness insurance on themselves.
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When creating 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, vital illness benefits payable to a personal corporation can only be paid out because either taxable employment income or even taxable dividends.

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

d) Corporation critical illness insurance

Some employers have included critical illness coverage into a wage 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 towards the employee because they are not payable on a periodic basis. If the employee suffers a critical illness, benefits will be compensated directly to the employee under the important illness policy.

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

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