What are the consequences of re-purposing insurance cover?


David Glen, National Technical Manager

David Glen, National Technical Manager


Our group of directors have current Key Person owned and paid for by the company. The directors would like to retain the cover and change ownership and beneficiaries. They also have a need for higher buy/sell, but are reluctant to apply for new cover for medical reasons.

Is it possible to change from Key Person to buy/sell or personal cover, and if so, are there any tax implications? 


Our views are expressed subject to the Disclaimer at the foot of this answer.

Ownership change

Care needs to be taken when ownership of an insurance policy is changed from the original owner to a new owner.

Life insurance claims proceeds are typically taxed as a disposal of a Capital Gains Tax (‘CGT’) asset unless the policy owner/beneficiary meets the relevant CGT exemption. 

The CGT exemption criteria are as follows:

  • The policy owner is the original owner, or
  • Acquired the rights for no consideration, or
  • Is a superannuation fund trustee

Consideration can be defined as: 

  • an agreement to do something in return for something else 
  • a payment of money in exchange for an item or a right 
  • an exchange of life policies, i.e. dual assignment 
  • the acquisition or disposal of a right 
  • giving, or receiving the benefits of, promises, or 
  • an exchange of property

In the case of an assignment pursuant to a business succession arrangement, there is a high risk of consideration being imputed, as the assignment generally takes place as part of a broad business succession arrangement which in most instances involves consideration being provided by the involved parties.

Before proceeding with assignment, it would be worthwhile having the client’s taxation adviser review the impact of any potential CGT implications. 

The above rules do not apply to TPD or trauma policies.  Where trauma or TPD policies are held on capital account (e.g. policies funding a buy/sell arrangement), any claim proceeds received would be free of CGT if received by the injured/ill life insured or a relative as defined.

It would also be prudent to see whether or not the policies might simply be cancelled and re-issued by the Insurer, this would be subject to the Insurers internal product rules and may depend on policy age, product series, closed products etc.
This would allow the CGT exemption to apply as the individual would then be deemed the original owner of the policy at time of claim.

Purpose of cover
The change of purpose for the cover (ie key person to Buy/Sell or key person to personal) would be a secondary matter for attention. 
It is important the directors promptly update their documentation outlining the new purpose for the cover and notify their accountant to determine any change in premium deductibility & whether FBT is now applicable.  

This information is general in nature only, and is not intended to be legal, taxation or financial advice. TAL Life Limited, its subsidiaries and its representatives have not taken into consideration any individual’s personal circumstances, financial needs or objectives in preparing it.
If any persons are intending to act on the information contained in this email, consideration should be given to the appropriateness of this general information in the light of their own objectives, financial situation or needs, before acting on this information, and independent professional advice on the application of the matter to their individual circumstances should be sought.
In relation to any financial product referred to in this email, a copy of the product disclosure statement should be obtained from the issuer and read prior to making any decision regarding the acquisition of a financial product. No warranty is given that the information is complete, and liability for any losses that may arise from reliance on this information is excluded to the fullest extent permitted by law.   


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