The benefits of corporate life insurance
In the life of a company, corporate life insurance can also appear as a form of benefit, but it can also help in the field of inheritance.
Life insurance was already mentioned in a previous post, and you may also have read about how much life insurance you need in general.
Corporate life insurance is no different, just as you go through the questions already covered in insurance before you nod. These issues (especially in the corporate sector) are mainly in the area of costs and available benefits.
In this article, we’ll walk you through the types of corporate life insurance, their most common uses, and their taxation. (Tax issues may vary by country, so seek the advice of a local tax expert before making a decision.)
Types of corporate life insurance
In life insurance, the insured person is, without exception, a natural person, so there is no difference in terms of insurability between whether the premium payer is an individual or the premium payer is a company.
Term life insurance
The insurer then undertakes that if the insured is still alive at a given time and the contract has not been terminated by either party, it will give a pre-determined amount to the person designated as the beneficiary (this may also be the insured).
Whole-life life insurance
In this case, the insurer pays the beneficiary in the event of the death of the insured, who, of course, can no longer be the insured here. You can use this type of credit and life insurance for both individuals and businesses.
Mixed type life insurance
A combination of the above, i.e., the insurer pays when the insured dies or reaches a certain date. With this type, the insurer determines the amount of the payment in advance, so the money paid is ultra-conservative as a way of managing the investment.
Life insurance combined with investment
They are even known as unit-linked life insurance. Life insurance (also) used for capital formation, which pays the accumulated amount and the premium due as a death service at the time of the insured’s death, or, if the insured is alive, pays the accumulated amount at a certain time (maturity or repurchase).
It is similar to mixed type of life insurance, but here it is possible to work more capital.
The most common use of corporate life insurance
You can legally use these options at the same time, as nothing prohibits them. Regardless, I haven’t seen a company that would have done it yet.
There are two main reasons for this:
- priorities: quite simply only one or two areas were just important to them, the rest was not relevant
- capital requirement: it sounds good to want everything, but it also has a capital requirement, which makes it not necessarily a good idea anymore.
As part of an employee benefit package
Today, for a company, it’s not just a question of what the gross monthly salary is. Although it is important, but in many places fringe benefits are emphasised too.
With normal life insurance, you have the opportunity to take care of your employee’s relatives in the event of the death of that employee. Since then the insurer is the one who pays, you can do this without it causing you any financial problems there and then.
“Replacement” of staff
The death of a highly skilled employee is not only a human tragedy, but can also be a problem for the operation of your business. If the company is marked as the beneficiary of the normal death insurance, you can make up for the lost expertise from the sum insured sooner.
Many people don’t think about the question all the way through, though it’s worth immersing at least once.
In the case of inheritance, one of the main problems may be the inclusion of persons who
- don’t understand the business: they won’t deal with the business for a minute, but by exercising ownership, the short-term benefits will be more important to them than the development of the company
- they have not worked for the company so far, they may not be doing well with the other existing owners
- although they understand how to operate, they are fine with everyone, but they do not want to deal with the company at all for any other personal reason
In such cases, the management of the company has the opportunity to give an option for redemption with the sum insured. That is, those who already own the company (e.g., a co-owner) can purchase the inherited portion of the heir by offering a fair amount.
Dividends are used by many for firefighting. But if you plan this responsibly, you, as the owner, can coordinate with your private finances. The advantage of this is that you can work out part (or even all) of the tax by working on the amount of dividends as company assets before the taking out, and in the event of a sudden problem, there is a reserve in your company that you can call back. This gives you the opportunity not to rely on a member loan.
This point is rarely (well, never) applied to all workers. It is typically used to retain a staff, or it can come in handy to reward a key person with high expertise in a high position. If you raise capital for an employee for a purpose that affects his or her life, the following cases may occur:
- the employee stays until the end of the pre-determined date and receives the money: he/she is happy because he/she has money and you are also happy because a good specialist works for you for a long time as well.
- yet the employee leaves the company prematurely: then the money remains, and although you can find someone else instead, with the accumulated amount it can still be more efficient.
- the insured dies: then the beneficiary receives the amount accumulated in the contract. This is either a relative of the employee or the company.
Raising capital for a corporate project
Although investment loans or other corporate loan products can boost a business relatively quickly, you can still reduce the amount of credit you need and improve your creditworthiness if you have adequate reserves. Because unit-linked life insurance provides an opportunity to work your money more efficiently, even if you don’t pay too much attention or expertise to it. (Another option is to use a securities account, but here you must to pay attention to it.)
If you are more interested in any of the above topics, ask an appointment under the contact menu.
Taxation of corporate life insurance
The section on taxation that follows here is largely the same in all countries, but there may be differences. This article (at least numerically) is based on current Hungarian regulations.
You can also read about the taxation of corporate insurance on the National Tax and Customs Administration website, and in the case of life insurance, PIT is the guiding principle.
By paying the life insurance premium, a company has the option of setting the parameters of the contract to use the amount paid to the benefit of the employee (or other person). In other words, the company will not see a single penny of it at that time, as there may be no legal basis for recovery.
From an accounting point of view, the main question is whether life insurance causes an immediate and permanent loss of assets to the firm, possibly including rights through which the loss of assets either does not occur or occurs only as a result of a specific event.
In corporate life insurance, the roles are usually as follows:
- fee payer: the enterprise
- insured: the natural person to whom you have concluded the contract and at the same time the person whose consent is required for any modification of the contract.
- beneficiary: the natural or legal person who receives the sum insured at maturity or at the death of the insured
In the following, when I mention a person employed by the company, I mean the persons defined by Corporate Tax Act.:
- employed individual
- senior executive of the company
- member involved in the activity
- apprenticeship school student under an apprenticeship contract
- an individual in a voluntary legal relationship
The insured is employed by the company
The insurance premium paid is accounted for as other payments of a personal nature. A cost recognized for corporate tax, i.e. a tax base has decreased.
The insured is not employed by the company
Then the insurance premium paid is the cost of other services. It is not a recognized cost for corporate tax purposes as it was not in the interest of the business and therefore has no effect on the tax base.
In the case of unit-linked insurance
Charges to be paid in the event of permanent loss of assets
Although billing is a bit more complicated, you may need to choose this method.
It is less popular, because here the employee is also burdened by an amount received only at some point. The difference between gross and net accounting shows how much your burden will be, depending on what agreement you make with the employee. Make no mistake, not all items payable are reduced here, you “just” transfer the difference to the employee.
|Title||Net benefit||Gross benefit|
|Annual insurance premium||100.000,- Ft||100.000,- Ft|
|Gross benefit in relation to the insurance premium||150.377,- Ft||100.000,- Ft|
|Net benefit (fee actually paid)||100.000,- Ft||66.500,- Ft|
|Obligations of the employer|
|social contribution (gross benefit* 15,5%)||23.308,- Ft||15.500,-Ft|
|Vocational training contribution (gross benefit * 1.5%)||2.256,- Ft||1.500,-Ft|
|Obligations of the employee|
|PIT (gross benefit * 15%)||22.557,- Ft||15.000,-Ft|
|Pension contribution (gross benefit * 10%)||15.038,- Ft||10.000,-Ft|
|Health insurance contribution (gross benefit * 7%)||10.526,- Ft||7.000,-Ft|
|Labor market contribution (gross benefit * 1.5%)||2.256,- Ft||1.500,-Ft|
|Total burdens as an employer (fee + public charges)||175.941,- Ft||117.000,- Ft|
In the case of settlement as a receivable
If you do not choose the above settlement, which is due every year, but a much simpler one, you can choose to record the contract as a receivable.
It is easiest to present to the employee through the example of unit-linked life insurance.
Suppose a company enters into a fixed-term contract for a key person. The definite period is important, because only then is it possible to specify an expiration beneficiary! You can’t do it with the Whole Life mode.
- insured: the employee
- fee payer: the enterprise
- death beneficiary: in this example, a family member of the employee
- maturity beneficiary: the enterprise
As the company has the right here to recover the amount paid, the insurance premium paid into this account does not constitute a permanent loss of assets. In this case, the premium paid should be recorded as a claim against the insurer.
Then the settlement is as follows:
The insurance expires, the company receives the amount
The amount received reduces the receivable from the insurer. The difference between the two will appear, depending on its sign, either between the income from financial operations or between its expenses.
The insured dies and the money is given to the beneficiary
You transfer the fee previously recorded as a receivable to other payments of a personal nature. When making a payment, pay attention to the fact that the life insurance service that appears in the event of death is tax-free, so this only affects the equity.
Accounting for corporate life insurance
Accrual of the annual fee
As the annual fee paid and the business year of the business rarely overlap, it is necessary to use active accruals. The business year of the business usually turns on 31 December, while the insurance year covers the period covered by the annual premium paid. This is usually the same month of the following year as of the conclusion (e.g. May).
It is necessary to defer the fee already paid, but only due after the balance sheet date.
Debit 39 Accruals and deferrals of expenses and expenses – Credit 55 Other payments of a personal nature
Don’t forget to resolve this next year!
Accounting for the annual fee
If there is a permanent loss of assets, ie you do not register it as a claim
Accounting accounting of the insurance premium at the company as a premium payer:
D 55 Other payments of a personal nature – C 45 Suppliers
Accounting accounting of the employer’s tax and contribution burden at the enterprise:
D 55 Other payments of a personal nature – C 46 Other current liabilities
D 56 Wages and salaries – C 46 Other current liabilities
Accounting of the employee tax and contribution burden (pension and health insurance contribution, labor market contribution, PIT) at the company:
D 36 Receivables from employees – C 46 Other current liabilities
D 47 Wage transfer account – C 36 Receivables from employees
Registered as a receivable
Accounting for the insurance premium
D 36 Other receivables – C 45 Suppliers
- Have you used corporate life insurance so far? If so, how?
- Which of the above points can you start to implement today?
- How can you incorporate any of the above into the life of your company?
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