A strategic financial mechanism through which organizations mitigate the economic risk associated with the potential loss of a critical member by transferring coverage to an insurance company.
This plan not only protects you against financial losses, death, and disability of strategic personnel, but also offers optimal tax treatment, allowing premium deductibility and generating a technical reserve with significant tax benefits.
Purpose and Benefits of the Key Man
The purpose of the law is to compensate the financial losses of the company's key person upon permanent disability or death.
These potential losses may include management, customer and supplier relationships, and the impact on profits or revenue that the potential loss would represent.
As established by law, this tool has the benefit of being tax deductible.
Legal Framework: Article 27 Section XII (L.I.S.R.)
In cases where insurance is intended to provide benefits to workers, the provisions of the previous section must be observed.
If the insurance is intended to compensate the taxpayer for the decrease in productivity that could be caused by the death, accident or illness of technicians or managers, the deduction of the premiums will be applicable provided that the insurance is established in a plan in which the procedure for setting the amount of the benefit is determined and the deadlines and requirements established in general provisions are met.
Article 51 of the Regulations (I.S.R.)
Temporary Contracts: Insurance contracts will be temporary, with a term of no more than 20 years, and with a level premium.
Employment Relationship: The insured must have an employment relationship with the Company or be an industrial partner in the case of a partnership.
Contracting Party and Beneficiary: The taxpayer must be both a Contracting Party and an Irrevocable Beneficiary.
Policy Redemption: In the event of termination of the insurance contract, the policy will be surrendered and the taxpayer will accumulate the surrender amount to their income in the fiscal year in which this occurs.
Who is "key" in a company?
Founders and Partners: The company's founders, partners, or executives responsible for operating a vital aspect of the business (CEO or department heads).
Specialized Experts: Experts with extensive experience and specialized knowledge.
Public relations
Executives with public relations skills.
Administrators
People with administrative skills and a broad business vision.
Objective of "Keyman Insurance"
Prevention of Economic Imbalance
The insurance aims to prevent an economic imbalance in the business due to the loss of the so-called "key" person.
Ensure Business Continuity
Insurance compensation helps the company by providing sufficient cash flow to ensure profits or sales, allowing it to operate without financial strain until a new technician or manager is hired and trained to cover the duties and obligations of the absent employee.
Creation of a technical reserve with tax-deductible flows
The key man insurance contract works like a traditional savings policy through the legal entity. The fundamental difference is that the premiums come from the legal entity and are tax-deductible.
Premiums accumulate in the instrument and generate a reserve that the legal entity can use in the future to cover a liability or for an expansion strategy.
Typically, this reserve is used to renew business technology, replace obsolete machinery and equipment, or create a technical reserve for labor liabilities, as defined in Financial Reporting Standards (FRS-D3).
Financial Reporting Standards (NIF-D3)
Accounting Obligation
NIF-D3 establishes that companies in Mexico are required to reflect labor liabilities for post-employment benefits in their accounting.
Types of Benefits
Seniority bonuses, compensation, pensions for
retirement and death benefits, among others.
Accumulation of Obligations
These obligations are cumulative over time based on seniority, salary increases, or an increase in the worker's age.
Advantages of the Instrument
The tax advantages of the "Key Man" instrument can be exploited, and the reserve that the company is legally required to recognize can be amortized with tax-deductible cash flows.
Key Man Insurance Requirements
Regulatory Standards
- The company must be the insurance contractor and also the irrevocable beneficiary.
- The insured must have an employment relationship with the company or be an industrial partner in partnerships.
- The insured amount will be the one set to cover this need, satisfying the deadlines and requirements demanded by the Law.
- The contracts will be temporary, with a term of no more than 20 years and a level premium.
- Any amount paid to the company will be accumulated to the contractor's income in the corresponding year.
Insurability Requirements
Generally, to apply for insurance, you must present financial and legal information that justifies the insured amount and the insurable interest.
Importance of Structuring
It is extremely important to mention that when structuring this type of strategy, care must be taken not to penalize the company's liquidity. Therefore, it is essential to structure the strategy based on flow analysis with tax and financial advisors for its viability.
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449- 241 -6423
lps.lifeplanningsolutions@gmail.com
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