In the economic fabric of SMEs and TPEs, some skills are based on the shoulders of a single individual. The disappearance or temporary incapacity of this person weakens the structure and threatens its survival. Key human insurance compensates for this financial damage. For the financial officer or the accountant, control of theaccounting for key human insuranceguarantees tax compliance and optimisation of company costs.
The fundamental principle of key human insurance
Key human insurance is an insurance contract signed by a company on the head of an essential manager or collaborator, such as a elite businessman or researcher. Unlike a conventional death insurance where the beneficiaries are heirs,the company is here the subscriber and the sole beneficiarybenefits.
Tax deductibility of key human insurance premiums· See the official conditions to deduct premiums from your key human insurance contracts from your operating expenses.
The objective is to compensate for the financial loss related to the absence of that person. This injury covers the decrease in turnover, the recruitment costs for a replacement or the repayment of bank debts if the key man was surety.
How to account for key man insurance premiums?
The accounting record of premiums paid to the insurer follows the logic of an operating expense. It is necessary to distinguish this contract from the insurance of conventional persons, such as mutual insurance or collective provision, because its tax and accounting treatment is specific.
Accounts to be used for current entries
On receipt of the notice of expiry, the accounting entry shall consist of:
We debit the account6169 « Death insurance premiums (Men-key contracts) »for the amount without taxes. We credit the account.401 « Suppliers »to record the debt to the insurer. At the time of payment, the supplier account is paid by crediting the account512 « Bank ». The use of account 6169, rather than accounts 6161 or 6163 for multi-risk insurance, facilitates tracking at annual closure and tax calculation.
Management of year-end adjustments
If the period covered by the premium overlaps two accounting years, one must note thatdeferred charge (account 486). This step respects the principle of exercise independence and avoids distorting the result of the year.
Tax deductibility: conditions and limits
Taxation is an asset of the scheme, but it remains under the control of the administration. For premiums to be deductible from taxable income, three conditions must be met:
The contract must be signed for the purpose of operation, the enterprise must be the effective and irrevocable beneficiary of the compensation, and the risk covered must be the death or incapacity of the key man.
By isolating these flows in account 6169, the manager documents the value of human expertise on the balance sheet. It acknowledges that the company's capital is not limited to machinery or inventory, but includes critical know-how, the loss of which must be provided.
Note: if the contract provides for the payment of capital to a third party, such as the family of the manager, the premium loses its deductible character and can be reclassified as an advantage in kind, resulting in a tax adjustment.
Accounting for claims
If the risk occurs, the insurer pays compensation to the company. The accounting treatment differs radically from that of premiums.
Registration of exceptional product
The compensation received is a taxable product that increases the result of the fiscal year. It is recorded by account debit512 « Bank »and credit of the account778 « Other exceptional products ».
Tax spread
The payment of large capital can create an immediate tax burden. The General Tax Code allowsspread of taxable profit. The company may allocate the tax on the compensation in equal shares over the year of its payment and the following four years. This spread preserves cash flow to finance business reorganization.
Summary table of accounts and flows
The following accounts are commonly used for key human insurance:
| Operation | Debit Account | Credit Account | Nature |
|---|---|---|---|
| Premium call | 6169 | 401 | Deductible charge |
| Payment of premium | 401 | 512 | Treasury |
| Receipt of compensation | 512 | 778 | Taxable product |
| Inventory regularization | 486 | 6169 | Accrued charge |
Differences with cross-guarantees between partners
Key human insurance is often confused with theCross guarantee of associates. Their accounting purposes and treatment differ. In a cross-guarantee, the objective is to allow surviving partners to redeem the shares of the deceased partner. The company is not usually the beneficiary.
The premiums paid for a cross-guarantee are notnot deductiblethe result of the enterprise. They are considered personal expenses of the partners. Conversely, key human insurance compensates for a loss of operations, which justifies its inclusion in deductible expenses.
Control over the accounting of key human insurance is based on strict allocation of accounts and vigilance over the terms of the contract. Well managed, it secures the financial sustainability of the organisation.