Taxation of Critical Illness Policies

2008-10-12T06:36:00.000-07:00

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

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

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

b) In a key person

If premiums are not deducted as business expenses then the benefit is tax free if the key person insured is designated as the 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 setting up ownership in a private corporation, one significant concern is that there is no mechanism similar to the capital dividend account to permit the benefits to be paid out on a tax-free basis to shareholders. As a result, critical illness benefits payable to a private corporation can only be paid out as either taxable employment income or taxable dividends.

Therefore, it could be significant implications where the critical illness benefit is intended to be used by the shareholders as part of a buy/sell arrangement, or to fund personal expenses arising from the critical illness.

4. Corporation critical illness insurance

Some employers have incorporated Critical Illness coverage into a wage loss replacement plan If the premiums for such coverage are deductible as a business expense to the employer then the benefit are not taxable to the employee because they are not payable on a periodic basis. If the employee suffers a critical illness, benefits will be paid directly to the employee under the critical 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 premium is paid and it funds all the benefits under the policy and It makes even more complicated to the taxation of the policy.

I hope this information will help. If you need more information, please visit my home page at:

http://lifeanddisabitityinsuranceunderwriter.blogspot.com/
http://businessdisabilityinsurance.blogspot.com/

Critical Illness Insurance 07

Taxation of Critical Illness Policies