Italian Supreme Court rules on “key-person” insurance policies: Tax aspects to look out for

In decision No. 24022/2024, the Italian Supreme Court addressed the tax treatment of life and accident insurance policies where the chair of the board of directors is insured, with family members or heirs as beneficiaries. The court held that premiums for these policies are not deductible from the company’s taxable income since they're not related to the business of the company.

This decision provides an opportunity to clarify the types of insurance policies available to companies, particularly distinguishing between “key-person” insurance policies, where the company is the beneficiary, and policies underwritten for directors with their heirs as beneficiaries.

 

Key-person insurance policies

Key-person insurance policies are designed to protect a company against the loss of crucial individuals whose absence could lead to disruptions in operations, loss of leadership, or critical knowhow. The policies offer the company financial compensation to help it recover, for instance by recruiting a new manager or stabilizing the business.

Key-person policies generally involve:

• The policyholder (the company) paying a limited number of annual premiums.
• Coverage against the death of the insured key figure (demographic risk).
• Payment of an indemnity, potentially revalued over time.

There are two main types of key-person policies:

• Term Life Insurance: Pays a lump sum if the insured dies within a specified period outlined in the contract.
• Whole Life Insurance: Pays a lump sum upon the death of the insured, regardless of when it occurs.

 

Tax considerations

From a tax perspective, key-person insurance premiums can be considered inherent business expenses, as they are incurred to protect the company’s assets and ensure business continuity.

Italian tax authorities, including the Supreme Court, have consistently held that the concept of “inherency” must be evaluated in relation to the business activity, rather than simply through a direct correlation between costs and revenues. So key-person policy premiums, which are paid to mitigate risks related to the company’s operations, are functionally connected to the business and are deductible.

Moreover, the sums paid to the company upon the death of a key person would be treated as taxable income for the business.

 

Policies with directors or heirs as beneficiaries

The case before the Supreme Court involved life and accident insurance policies where the director or their heirs, not the company, were beneficiaries. In such scenarios, according to the Supreme Court, the premiums paid would not be linked to the company’s business activity so they couldn't be deductible for income tax purposes.

But it could be argued that since the policy is underwritten by the company for the death or accident risk of a director, this could qualify as a remuneration in kind, taxable in the hands of the director, and in principle could be considered under certain conditions as a deductible cost for the company for income tax purposes.

 

Conclusion

It's critical to properly structure these insurance contracts, considering the role of the insured, the company’s internal organization, the nature of the business, and the designation of beneficiaries. Proper structuring ensures the correct tax treatment of premiums and helps avoid potential disputes with the Italian Tax Authorities over the inherency of the costs.