Key takeaways
- Under the Partnership Act 1961 (s 35), a partnership is dissolved by the death of any partner unless the partnership agreement says otherwise, and the deceased partner's share becomes a debt owed to the estate (s 45).
- A Sdn Bhd carries on after a director dies (Companies Act 2016 s 20), but the director's office is vacated (s 208) and the shares pass to the estate, so the family, not the surviving partner, becomes the co-owner.
- LHDN Public Ruling 2/2003 lets a company deduct keyman premiums only on term life or accident policies with no investment element, and the payout is then taxable; whole life and endowment premiums are not deductible and their payout is not taxed.
- In a controlled company (not more than 50 members, controlled by five or fewer people), keyman premiums on a director or employee who owns shares are not deductible, and neither are premiums on a partner or sole proprietor.
- Companies Act 2016 s 123 generally stops a Sdn Bhd from buying its own shares, so set up buy-sell cover with the shareholders, not the company, owning policies on each other's lives.
- A sole proprietorship's SSM registration ends automatically when the owner dies, and the next of kin or personal representative must notify SSM within four months.
What happens to the business when a director or partner dies or falls critically ill?
The answer depends first on how the business is registered. Many factory and shop owners I meet run a Sdn Bhd with one or two partners, but some still trade as an enterprise (sole proprietorship) or a partnership registered with SSM, and the law treats each one very differently.
| Business type | If the owner or a partner dies | If the owner or a partner is critically ill |
|---|---|---|
| Sole proprietorship (enterprise) | The registration ends automatically. The next of kin or personal representative must notify SSM within four months; failing to file can mean a fine of up to RM10,000, up to a year in jail, or both (SSM guideline). The business assets and debts become part of the estate. | Nothing ends legally, but everything depends on one person: when the owner cannot work, orders, signatures and supplier payments stop too. |
| Partnership | Dissolved as regards all partners, unless the partnership agreement says otherwise (Partnership Act 1961 s 35). The deceased partner's share is a debt owed to the estate from the date of death (s 45). If the others carry on without settling, the estate can claim a share of later profits or 8% interest a year on that share (s 44). | Not dissolved automatically. The other partners can ask the court to dissolve it if the sick partner is permanently unable to do their part (s 37). |
| Sdn Bhd (private company) | The company carries on as a separate legal entity (Companies Act 2016 s 20). The director's office is vacated (s 208), and a private company must keep at least one director who ordinarily lives in Malaysia (s 196). The shares pass to the estate and can be transmitted to the executor or administrator (s 105(5)). | The director stays in office unless found to be of unsound mind (s 208(1)(e)), so the company is not stuck legally, but it loses that person's work, customer relationships and signing power. |
Two problems come up again and again. First, the shares go to the family, not to the surviving partner. Your partner's spouse or children become co-owners of your company, and they may need cash far more than shares. Second, the estate takes time: the executor usually needs a grant of probate before dealing with the shares (see my grant of probate guide), and if the only director has died, there may be nobody to sign cheques or appoint a new director in the meantime.
Debts do not disappear either. A partner's estate stays liable for partnership debts incurred while they were a partner (Partnership Act s 11). If a director signed a personal guarantee for the company's bank facility, their death ends a continuing guarantee only for future transactions, unless the contract says otherwise (Contracts Act 1950 s 84); it does not cancel what was already owed under it.
What is keyman insurance, and who counts as a key person?
LHDN describes it plainly: the death, critical illness, sickness, accident or injury of an employee or a director may cause the employer a loss of business income, and insurance taken on the life of that key person to cover this risk is known as keyman or key-person insurance. The right to the payout must stay with the company; it must not be payable to the key person or their family (Public Ruling No. 2/2003).
So in a keyman policy the company is the policy owner, pays the premium and receives the money. A key person is anyone whose absence would cut profits, for example:
- the founder-director who holds the main customers, the bank relationship and the personal guarantees;
- a production manager or engineer who is the only one who really knows how the machines and processes run;
- a sales director who brings in most of the orders;
- a partner whose skills or professional licence the business depends on.
For employees the law is straightforward: the Financial Services Act 2013 deems a person to have an insurable interest in the life of their employee (Schedule 8 para 3(3)), and a life policy on someone the buyer had no insurable interest in when the policy started is void (para 3(1)).
What the keyman payout is used for
| What happens after losing the key person | How the payout helps the company |
|---|---|
| Profit drops while sales are rebuilt | Fills the profit gap until a replacement is up to speed |
| A replacement has to be found and trained | Pays recruitment, a higher salary and training |
| The bank reviews a facility the person guaranteed | Gives the company cash to reduce or settle the loan |
| Suppliers and staff lose confidence | Keeps payments and salaries on time while things settle |
How much keyman cover?
Malaysian law sets no formula. I work it out with business owners from three numbers: the profit the person brings in each year, how long it would realistically take to find and train a replacement, and the loans or guarantees tied to that person. Then we decide whether the policy should pay on death only or also on critical illness. An owner who survives a stroke or cancer but cannot work for a year can hurt the business as much as a death, and LHDN's own description of keyman risk includes critical illness and sickness, not only death.
How does a buy-sell agreement between partners or shareholders work?
Keyman cover protects the company. A buy-sell arrangement protects the owners and their families. The partners or shareholders sign an agreement that if one of them dies (and, if they choose, becomes totally disabled or critically ill), the others will buy that person's shares or partnership share at a price set by an agreed formula, and the family will sell. Life insurance supplies the cash on the day it is needed.
- Value the business. Agree a value or a formula (for example based on net assets or profit) and when it is reviewed each year.
- Write the agreement. A lawyer drafts the buy-sell agreement and checks it against your partnership agreement or company constitution, including any limits on share transfers. The Partnership Act itself lets the partners' agreement override automatic dissolution (s 35) and recognises an option for surviving partners to buy a deceased partner's share (s 44).
- Insure each owner for the value of their stake. Each shareholder owns, pays for and receives the payout of a policy on the other's life (cross-ownership).
- When an owner dies, the surviving owner claims on the policy and pays the estate the agreed price, and the executor transfers the shares.
- Review every year, and whenever the business value, the shareholding or a bank facility changes.
Why the shareholders, not the company, should own buy-sell policies in a Sdn Bhd
The Companies Act 2016 generally stops a company from buying, dealing in or lending money on its own shares (s 123), and only companies quoted on a stock exchange may buy back their own shares (s 127). Company money is therefore not a simple way to buy out a deceased shareholder's family. Ask your company secretary or lawyer before you choose a structure.
Two traps to avoid
- Insurable interest. A business partner is not on the FSA's list of people you are deemed to have an insurable interest in (spouse, child, ward under age, employee, or someone you depend on for maintenance or education). You need a real financial interest in your partner's life when the policy starts, which the signed agreement and share valuation help to show.
- Naming your partner as nominee does not work. If you insure your own life and simply name your business partner as nominee, your partner receives the money only as an executor, not as a beneficiary: it forms part of your estate and is subject to your debts (FSA Schedule 10 para 6). Only a spouse or child (or a parent, where there is no spouse or child) nominated by a non-Muslim policy owner receives the money on trust, outside the estate (para 5). My insurance nomination guide explains the difference.
Who should own the policy, who pays, and who gets the money?
| Arrangement | Policy owner and payer | Life insured | Payout goes to | What it solves |
|---|---|---|---|---|
| Keyman insurance | The company | The key person (director, manager or partner) | The company only, never the key person or family (PR 2/2003) | Lost profit, replacement cost, loans |
| Buy-sell (cross-ownership) | Each shareholder or partner | The other shareholder or partner | The surviving owner, who pays the estate for the shares | Who owns the company after a death; fair cash for the family |
| Owner's personal life policy | The owner | The owner | The owner's nominees (spouse, children, parents) or the estate | The family's living costs, home loan and children's education |
| Company pays for the director's personal policy | The company pays, the family benefits | The director | The director's family or nominee | Family protection, but the premium is a taxable perquisite of the director (PR 5/2019 para 6.8.1) |
The nomination rules in Schedule 10 of the FSA apply only to a policy that a person takes on their own life (para 1). A company-owned keyman policy, or a buy-sell policy you own on your partner's life, pays the policy owner directly, which is exactly what each arrangement needs. The flip side: if you are the policy owner and you die first, the policy you own on your partner becomes part of your estate, so the agreement should say what happens to it.
Keep three needs apart: the business (keyman), the shares (buy-sell) and your own family (personal life cover and a will). A keyman payout belongs to the company and does not reach your spouse, so your family's protection still has to come from your own policies and estate plan.
Is keyman insurance tax deductible in Malaysia? What LHDN says
LHDN's Public Ruling No. 2/2003 on key-man insurance was issued on 30 December 2003, applies from the year of assessment 2004, and is still listed without a superseding ruling on LHDN's public rulings page. It sets these rules:
| Situation | Premium | Payout |
|---|---|---|
| Term life or accident policy on a key person, no investment element, company keeps the right to the payout | Deductible against business income | Taxable on the company |
| Whole life or endowment policy (has cash value, treated as a capital asset of the company) | Not deductible | Not taxable |
| Controlled company insuring a director or employee who owns shares in it | Not deductible | Not stated in the ruling: ask your tax agent |
| Policy on a partner or a sole proprietor | Not deductible | Not stated in the ruling: ask your tax agent |
A controlled company is a company with not more than 50 members, controlled by not more than five persons (Income Tax Act 1967 s 2). That describes many family Sdn Bhds, so if the key person is also a shareholder, plan on the premium not being deductible. LHDN's reason is that the cover then also benefits the person as a shareholder.
The ruling gives its own examples. A company paying RM20,000 a year on an endowment keyman policy for its managing director cannot deduct it, because the company has acquired an asset. When two key people die, RM2,000,000 from a term policy whose premium was deducted is taxed, while RM500,000 from a whole life policy whose premium was not deducted is not.
Two more rules owners often miss:
- If the company pays the premium on a policy where the employee, their family or their nominee is the beneficiary, that premium is a perquisite and taxable on the employee (Public Ruling No. 5/2019 para 6.8.1).
- Personal life insurance relief (up to RM3,000, shared with voluntary EPF top-ups) covers only policies on your own life or your spouse's (Form BE YA 2025 notes, item G17). A buy-sell policy you own on your partner's life does not qualify.
This is general information, not tax or legal advice. Confirm the treatment for your own company with your tax agent and lawyer.
Worked example: keyman and buy-sell cover for a two-partner factory
Example only, with assumed figures. Partner A and Partner B run a metal-stamping factory in Puchong as a Sdn Bhd. A owns 60% and B owns 40%, and both are directors, so it is a controlled company. They agree to value the company at RM3,000,000 for the buy-sell agreement. Their production manager owns no shares, and they estimate the company would lose RM250,000 of profit a year for two years if he were suddenly gone.
| Item | Assumption and result |
|---|---|
| Agreed company value | RM3,000,000 (assumed) |
| Partner A's 60% stake | RM1,800,000: B owns a policy on A's life for this amount |
| Partner B's 40% stake | RM1,200,000: A owns a policy on B's life for this amount |
| Keyman cover on the production manager | RM250,000 x 2 years = RM500,000 on a term policy owned by the company |
| Tax on that term keyman policy | Premium deductible; a RM500,000 payout would be taxable on the company (PR 2/2003) |
| Keyman cover on A or B themselves | Possible, but premiums are not deductible because they are shareholder-directors of a controlled company |
| Buy-sell premiums | Paid by A and B personally; no personal life insurance relief, as each policy is on someone else's life |
If A dies, B receives RM1,800,000 from the policy and pays it to A's estate for the 60% stake, as the agreement requires. A's family receives cash instead of a factory they do not run, and B keeps control. If the production manager dies, the company receives RM500,000 to cover the profit gap and hire a replacement.
Common mistakes I see
- Buy-sell policies bought without a signed agreement, so the family is not obliged to sell and the survivor is not obliged to buy.
- A share value set years ago and never reviewed, so the cover no longer matches the price.
- A "keyman" policy with the director's spouse as beneficiary, which turns it into personal cover and a taxable perquisite.
- Death cover only, when a long illness would hurt the business just as much.
- No will covering the shares, which slows the estate down and lets the law, not you, decide who inherits them.
Not sure your business is protected? What I check with you
I look after factory, shop and office owners in Kuala Lumpur and Selangor, including Seri Kembangan, Serdang, Puchong, Cheras and Klang, in Mandarin, English or Cantonese. Great Eastern's own life insurance page lists business continuity, the unexpected loss of a key person or owner, as one of the reasons to have life cover. Tell me how your business is set up and I will:
- map who the key people are and what losing each one would cost the business;
- check the structure (enterprise, partnership or Sdn Bhd) and what your partnership agreement or constitution says;
- check what Great Eastern offers for your keyman and buy-sell needs, decide with you whether term or whole life, death only or with critical illness cover suits each one, and set up the policy owner and payout correctly;
- work with your lawyer or company secretary on the buy-sell agreement, and with your tax agent on the tax treatment;
- review your personal cover and your will with Rockwills, so your own family is protected separately from the business.
If what you already have fits, I will tell you so. No hard selling. For fire, liability and the rest of your business cover, see business insurance for SMEs, factories and shops.