Get personalized insurance quotes from Australia's leading providers in just 2 minutes.
What Is Key Person Insurance?
Key person insurance (sometimes called "key man insurance" or "key employee insurance") is a life insurance policy that a business takes out on individuals who are essential to its operations. If that person dies or becomes permanently disabled, the business receives a lump sum payout to help it survive the financial impact of losing them.
Unlike personal life insurance where the individual is both the insured and the policy owner, key person insurance has a distinct structure:
Policy owner: The business (company, partnership, or trust)
Life insured: The key person (employee, director, or owner)
Beneficiary: The business
Premium payer: The business
The fundamental purpose is straightforward: protect the business from the financial consequences of losing someone it cannot easily replace.
The Business Impact of Losing a Key Person
When a critical person suddenly leaves a business, the effects ripple through multiple areas:
Immediate operational disruption:
Projects stall or fail without their expertise
Client relationships may be damaged or lost
Staff morale and productivity decline
Decision-making bottlenecks emerge
Financial consequences:
Revenue loss from clients who followed the key person
Costs to recruit and train a replacement
Lost business opportunities during the transition
Potential loan defaults if banks lose confidence
Reduced business valuation
Long-term strategic impact:
Competitive advantage erodes
Innovation slows
Growth plans are delayed or abandoned
Potential business failure in severe cases
Key person insurance provides a financial buffer to help the business navigate these challenges without collapsing.
Who Is a "Key Person"?
Not everyone in a business qualifies as a "key person" for insurance purposes. The test is whether their absence would cause significant financial harm to the business.
Common Types of Key People
Founders and Business Owners
Often the face of the business
Hold critical relationships with major clients, suppliers, or investors
Possess irreplaceable institutional knowledge
May have personal guarantees on business loans
Revenue Generators
Top salespeople who bring in disproportionate revenue
Rainmakers who attract and retain major clients
Relationship managers for key accounts
Business development leaders
Technical Experts
Lead developers or engineers with unique skills
Scientists or researchers driving R&D
Specialists with rare qualifications or certifications
Creators of proprietary processes or intellectual property
Operational Leaders
CEOs and managing directors
COOs who keep operations running smoothly
CFOs with critical financial relationships
Division heads managing major business units
Creative Talent
Lead designers or creative directors
Brand architects
Content creators with personal following
Innovation leaders
Identifying Your Key People: The Three Questions
To determine if someone is a key person, ask these questions:
1. Revenue Impact: Would the business lose significant revenue if this person left suddenly?
Do they personally manage major client relationships?
Are they responsible for a large portion of sales?
Would clients leave if this person was no longer available?
2. Operational Impact: Would the business struggle to function without them?
Do they have unique skills or knowledge that others cannot replicate?
Are they the only person who can perform certain critical functions?
Would projects fail or stall without their involvement?
3. Replacement Difficulty: How hard would it be to replace them?
Is their expertise rare in the market?
Would recruitment take months or years?
Would training a replacement be expensive and time-consuming?
If you answer "yes" to any of these questions, you likely have a key person who should be considered for insurance.
Protect Your Business from the Unexpected
Get a key person insurance assessment from our business insurance specialists. We'll help you identify coverage needs and compare options.
Calculating the right coverage amount is critical. Too little coverage leaves the business exposed; too much wastes money on unnecessary premiums.
The Two Types of Loss
Key person insurance typically covers two types of financial loss:
1. Revenue Loss (Revenue Protection)
The income the business will lose while finding and training a replacement, plus potential permanent revenue reduction if client relationships are damaged.
2. Capital Loss (Capital Protection)
The cost of recruiting, hiring, and training a replacement, plus any debts that need to be repaid if the business loses a guarantor.
Calculating Revenue Protection Coverage
Formula:
Revenue Protection = Key Person's Revenue Contribution x Recovery Period (years)
Example - Sales Director:
Total business revenue: $5,000,000/year
Sales Director personally responsible for: 40% = $2,000,000/year
Estimated recovery period: 2 years
Coverage needed: $2,000,000 x 2 = $4,000,000
Factors affecting the recovery period:
How specialised is the role? (6 months to 3+ years)
How competitive is the talent market?
How complex are the client relationships?
How much institutional knowledge needs to be transferred?
Calculating Capital Protection Coverage
Formula:
Capital Protection = Recruitment Costs + Training Costs + Lost Profits During Transition + Debt Repayment
Example - Technical Co-Founder:
Executive recruitment fees: $150,000
Salary during 12-month onboarding: $300,000
Lost productivity during transition: $400,000
Business loan personally guaranteed: $500,000
Coverage needed: $1,350,000
Multiple Calculation Method
A simpler approach used by many advisers:
Key Person Type
Typical Multiple of Salary/Contribution
Sales/Revenue Generator
5-10x annual revenue contribution
Technical Specialist
3-5x annual salary
Executive/Owner
5-10x annual salary or profit contribution
Creative/Innovation Leader
3-7x annual salary
Example:
CFO salary: $250,000/year
Multiple: 5x
Coverage: $1,250,000
Coverage Limits and Practical Considerations
Most insurers will provide key person coverage up to:
$5-10 million per person for major insurers
$20 million+ may require multiple insurers or reinsurance
Important: Insurers will require evidence of the key person's value to the business. Be prepared to provide:
Financial statements showing revenue attribution
Employment contracts
Client lists or revenue breakdowns
Business plans demonstrating the person's role
Tax Treatment of Key Person Insurance
The tax treatment of key person insurance in Australia depends on the purpose of the policy. This is one of the most misunderstood aspects of business insurance, and getting it wrong can have significant tax consequences.
Revenue Protection Policies (Tax-Deductible)
If the policy is designed to replace lost revenue or profits caused by the key person's death or disability:
Premiums: Fully tax-deductible as a business expense
Payout: Fully assessable as taxable income
ATO Requirements for Deductibility:
The policy must be taken out for the purpose of replacing lost income/revenue
The business must be able to demonstrate the nexus between the key person and revenue
The policy must be in the business's name (not the individual's)
Premiums must be paid by the business
Example:
Business insures sales director for $2,000,000 (revenue protection)
Annual premium: $5,000
Tax treatment: $5,000 deductible against business income
If claim paid: $2,000,000 assessable income to the business
Capital Protection Policies (Not Tax-Deductible)
If the policy is designed to fund the replacement of the key person (recruitment, training) or repay capital debts:
Premiums: NOT tax-deductible
Payout: NOT assessable as taxable income (capital receipt)
This applies when:
The policy funds recruitment and training of a replacement
The policy repays debts or shareholder loans
The policy funds a buy-sell agreement
Example:
Business insures founder for $1,500,000 (capital protection)
Annual premium: $4,000
Tax treatment: Premium not deductible
If claim paid: $1,500,000 received tax-free
Hybrid Policies: Split Treatment
Many businesses have policies that serve both purposes. In these cases:
Policy B: Capital protection (non-deductible premiums, tax-free payout)
Option 2: Single Policy with Apportionment
Determine the percentage for each purpose
Apportion premiums and payouts accordingly
Document the apportionment clearly
Example - Hybrid Approach:
Total coverage: $3,000,000
Revenue protection component: $2,000,000 (67%)
Capital protection component: $1,000,000 (33%)
Total premium: $8,000/year
Deductible portion: $8,000 x 67% = $5,360
Non-deductible portion: $8,000 x 33% = $2,640
Tax Treatment Summary
Feature
Revenue Protection
Capital Protection
Purpose
Replace lost business income/profits
Fund replacement costs or repay debts
Premium Deductibility
Fully tax-deductible
NOT tax-deductible
Payout Tax Treatment
Fully assessable income
Tax-free (capital receipt)
ATO Reference
IT 155, TR 2012/6
TD 93/14, IT 2664
Best For
Protecting against revenue loss from key salesperson or rainmaker
Funding buy-sell agreements, loan repayments, or recruitment costs
Tax treatment depends on the policy purpose. Consult your tax adviser for specific advice.
Critical Tax Documentation
To support your tax position, maintain clear documentation:
Board resolution stating the purpose of the insurance
Written policy statement outlining why the insurance was taken out
Evidence of the key person's contribution to revenue (if claiming deductibility)
Consistent treatment year-over-year
Warning: The ATO can look back and reassess if the stated purpose doesn't match reality. If you claim deductions for a "revenue protection" policy but use the payout to fund a buy-sell agreement, you may face amended assessments and penalties.
Key Person Insurance and Buy-Sell Agreements
Key person insurance is often confused with buy-sell insurance, but they serve different purposes. Understanding the distinction is important for business owners.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a contract between business owners that:
Sets out what happens to ownership if an owner dies, becomes disabled, or exits
Establishes a mechanism to value the business
Provides a funding method for remaining owners to buy out the departing owner's share
Key Differences
Feature
Key Person Insurance
Buy-Sell Insurance
Purpose
Protect business from financial loss
Fund ownership transfer
Beneficiary
The business
Remaining owners (or their trust/entity)
What it pays for
Revenue loss, replacement costs
Purchase of deceased owner's shares
Who decides use of funds
Business management
Predetermined by agreement
Tax treatment
Depends on purpose
Generally capital (non-deductible/tax-free)
How They Work Together
Many businesses need both types of coverage:
Scenario: Three partners own equal shares in a $6,000,000 business. One partner dies.
Without proper insurance:
Deceased partner's estate owns 1/3 of the business
Surviving partners must work with (or buy out) the estate
May need to sell business assets or borrow heavily
Business operations disrupted during disputes
With key person insurance only ($1,500,000):
Business receives $1,500,000
Helps cover revenue loss and operational disruption
But: Deceased partner's family still owns 1/3
Ownership dispute may still occur
With buy-sell insurance only ($2,000,000 per partner):
Surviving partners receive funds to buy deceased partner's share
Clean ownership transfer occurs
But: No funds for the business itself to manage the transition
With both types of coverage:
Key person insurance: Business receives funds to manage operational impact
Buy-sell insurance: Surviving partners buy out deceased partner's family
Clean transition with both business protection and ownership certainty
Structuring Buy-Sell Insurance
The three main structures for buy-sell insurance are:
1. Cross-Ownership (Each owner insures the others)
Owner A has a policy on Owner B's life, and vice versa
Pros: Simple, direct funding
Cons: Unequal premiums if owners are different ages/health; limited to 2-3 owners
2. Self-Ownership (Each owner insures themselves)
Owner A has a policy on their own life, owned by their family/trust
Proceeds go to family, used to sell shares to remaining owners
Pros: Owner controls their own policy
Cons: Relies on family following through with the sale
3. Company/Trust Ownership (Business entity owns all policies)
Business owns policies on all owners
Proceeds fund share buyback
Pros: Cleaner structure, works for any number of owners
Cons: Tax implications vary; shares may need to be cancelled vs transferred
The best structure depends on your business type, number of owners, and tax situation. Always consult a specialist adviser.
Need Help Structuring Business Insurance?
Key person insurance and buy-sell agreements require careful planning. Our business insurance specialists can help you design the right protection for your business.
Capital protection component: $2,000,000 (non-deductible)
Buy-sell insurance: $2,000,000 (owned by junior partners' trusts)
Annual premium: $12,800
Why This Structure:
Split policy allows partial deductibility
Revenue protection covers 2 years of client revenue at risk
Capital protection covers loan guarantee plus recruitment costs
Buy-sell insurance ensures clean ownership transfer
Case Study 3: Family Manufacturing Business
Situation:
Metal fabrication business, third generation
Managing Director (aged 58) has all major supplier and customer relationships
Son (aged 32) being groomed as successor but not yet ready
$8M annual revenue, $1.5M profit
Business owns property valued at $3M
Risks Identified:
MD death would disrupt supplier terms and customer relationships
Son not ready to take over for 3-5 years
May need to hire interim management
Key contracts may be renegotiated unfavourably
Solution:
Key person insurance on MD: $2,500,000
Revenue protection: $1,500,000 (2 years of potential profit impact)
Capital protection: $1,000,000 (interim management and transition costs)
Succession plan: Accelerate son's development, document all key relationships
Annual premium: $18,500 (higher due to age)
Why This Structure:
Coverage decreases importance as succession progresses
Policy will be reviewed annually and reduced as son takes on more responsibility
Revenue protection component protects against customer and supplier disruption
Capital component funds interim leadership if needed
Case Study 4: Medical Practice
Situation:
GP practice with 4 doctors
One doctor (specialist in women's health) generates 45% of practice revenue
Strong patient loyalty to this doctor specifically
Practice revenue: $3.2M annually
Risks Identified:
Star doctor's absence would cause significant patient loss
Difficult to attract specialist replacement in regional area
Remaining doctors cannot absorb patient load
Practice may need to downsize
Solution:
Key person insurance on specialist doctor: $2,000,000 (revenue protection)
Coverage purpose: Replace lost revenue during 2-year recruitment period
Annual premium: $3,400
Why This Structure:
Pure revenue protection as the main risk is patient revenue loss
Premiums fully deductible
Payout would be assessable but offset against actual revenue loss
Coverage amount based on 45% of revenue x 2 years, reduced for patients who would stay
Frequently Asked Questions
Is key person insurance a legal requirement in Australia?
No, key person insurance is not legally required. However, it may be:
Required by lenders as a condition of business loans
Required by investors or venture capitalists
Expected by business partners as part of a shareholders' agreement
Prudent business practice for any company with critical individuals
Some industries and professional bodies recommend it as part of good governance.
Can the key person be forced to undergo medical tests?
No, but insurance may not be available without them. The key person must consent to:
The insurance being taken out on their life
Any medical examinations required by the insurer
Disclosure of their health information
If a key person refuses to cooperate, the business cannot insure them. This can be addressed through employment contracts or shareholder agreements that require participation in key person insurance programs.
What happens if the key person leaves the company?
When a key person leaves voluntarily (resignation, retirement), the business has several options:
Cancel the policy: Receive any surrender value (if applicable) and stop paying premiums
Transfer ownership: The departing employee may be able to take over the policy for their personal use
Convert to another purpose: If another employee becomes a key person, some policies can be restructured
Maintain temporarily: Keep the policy during a handover period if the person remains involved as a consultant
The best approach depends on the policy terms and business circumstances.
How does key person insurance work with multiple business owners?
For businesses with multiple owners who are all key people:
Each owner can be insured under separate key person policies
Coverage amounts may differ based on each person's contribution
Buy-sell insurance should complement (not replace) key person insurance
Cross-ownership or entity-ownership structures may be appropriate
The key is ensuring both the business AND the ownership succession are protected.
Can key person insurance be held in superannuation?
No, key person insurance cannot be held in superannuation. Super funds can only hold insurance that benefits the member (the individual), not the business.
Key person insurance must be:
Owned by the business (company, partnership, or trust)
Paid for with business funds (after-tax or before-tax depending on type)
Separate from any personal insurance the individual may hold
What's the difference between "own occupation" and "any occupation" TPD for key person insurance?
If your key person insurance includes TPD coverage:
Own Occupation TPD: Pays if the key person cannot work in their specific occupation (e.g., a surgeon who can no longer operate)
More expensive
Easier to claim
Recommended for highly specialised key people
Any Occupation TPD: Only pays if the key person cannot work in ANY occupation suited to their education and experience
Less expensive
Harder to claim
May be adequate for less specialised roles
For key person insurance, "own occupation" definitions provide better protection because the key person's specific skills are what make them valuable to the business.
Summary: Is Key Person Insurance Right for Your Business?
Key person insurance is essential if your business:
Has individuals whose death or disability would cause significant financial harm
Relies on specific people for major client relationships or revenue
Has shareholders who need protection against ownership disruption
Has business loans with personal guarantees
To get started:
Identify who your key people are
Calculate the financial impact of losing them
Determine whether you need revenue protection, capital protection, or both
Get advice on tax treatment and policy structure
Implement coverage and review annually
The cost of key person insurance is typically a small fraction of the protection it provides. For most businesses with critical individuals, it's not a question of whether to insure, but how much coverage is appropriate.
General Advice Only
This is general advice only and does not take into account your individual circumstances.
Please read the Product Disclosure Statement (PDS) before making a decision.
Consider seeking personal advice from a licensed financial adviser.
Authorised Representative Number: 1244847 | Australian Financial Services Licence: 246623