Key Person Insurance FAQs

Question 1

What is key person insurance and how does it work?

Accepted Answer

**Key person insurance is a business-owned policy that pays the business if a critical employee or owner dies, becomes disabled, or suffers a critical illness.** The proceeds fund recruitment, replace lost revenue, or repay debt.

Key person cover is a use case, not a standalone product. The business buys Life, TPD, Trauma (Critical Illness), Income Protection, or Business Expenses cover on the life of a key employee or director. The business is the policy owner and the beneficiary.

## How the structure works in practice

1. The business identifies a key person whose loss would cause material financial damage.
2. The business takes out cover on that person's life (with the person's consent for medical disclosure).
3. The business pays the premium from its own cash flow.
4. If the insured event occurs, proceeds are paid to the business.
5. The business applies the proceeds to its documented purpose: revenue replacement, capital protection, or buy-out funding.

## How each panel insurer supports key person structuring

| Insurer | Mechanism |
|---|---|
| AIA | Business Safeguard Forward Underwriting (PDS Section 8.12), $10M max |
| Acenda | Business Safeguard Option, $15M Life max (PDS pages 56 to 58) |
| Zurich | Business cover events plus Zurich Business Expenses with key person replacement variant |
| TAL | Business Insurance Option under Guaranteed Future Insurability Benefit |
| OnePath | Future Insurability business events (PDS) |
| ClearView | Future Increase Benefit business events |
| NEOS | Future Increase Benefit business events ($200,000 per event cap) |
| Encompass | Future Increase Benefit with explicit 'revenue protection (key person)' wording |
| Futura | Future Increase Benefit business events ($200,000 per event cap) |

See **AIA Priority Protection PDS** (Version 32, 9 November 2025), Section 8.12, page 157; **Acenda Insurance PDS** (27 September 2025), pages 56 to 58; **Zurich Wealth Protection PDS** (1 November 2025), Business Expenses section; **TAL Accelerated Protection PDS** (12 December 2024), Guaranteed Future Insurability Benefit section.

## What key person cover is not

Key person cover is not the same as personal life insurance, salary continuance, or workers' compensation. The owner is the business, not the individual. Proceeds are paid to the business, not the individual's family. If the key person leaves, the business decides whether to continue, transfer, or cancel cover.

## Why purpose documentation matters

Australian tax treatment turns on the purpose of the cover, not the legal form. The Commissioner of Taxation's view in **ATO Taxation Ruling TR 2009/2** sets out the framework: revenue purpose cover (replacing lost income) carries deductible premiums and assessable proceeds; capital purpose cover (recruitment funding, debt repayment, equity buyout) carries non-deductible premiums and proceeds that are generally exempt under **ITAA 1997 s118-37(1)(a)**.

## Regulatory anchors

Key person policy contracts sit under the **Life Insurance Act 1995 (Cth)** and the **Insurance Contracts Act 1984 (Cth)**. Premium and proceeds tax treatment turns on **ATO TR 2009/2**, **ATO TR 95/35**, **ATO TR 85/36**, **ITAA 1997 s8-1**, and **ITAA 1997 s118-37(1)(a)**.

This is general advice only. Tax treatment is complex and depends on business structure (sole trader, partnership, company, trust), cover purpose, and policy ownership. Discuss the structure with a registered tax agent and a licensed insurance adviser before applying.

Question 2

Who qualifies as a 'key person' in a business?

Accepted Answer

**A key person is an employee, director, or business owner whose death, disability, or critical illness would cause material financial loss to the business.** The qualification turns on financial impact, not on job title.

The **Australian Taxation Office** describes a key person in **ATO Taxation Ruling TR 2009/2** as one whose loss would result in a significant loss of profits during the continuation of business operations. Panel insurers apply a similar test at financial underwriting.

## Common categories of key person

- **Founders and business owners** whose vision, client relationships, or technical expertise drive the business.
- **Company directors** with strategic control or external-relationship responsibility.
- **Partners in a partnership** whose share of profit reflects active contribution.
- **Senior sales staff** generating a material share of revenue (typically 20% or more attributable to one person).
- **Project managers or technical specialists** holding licences, certifications, or IP critical to operations.
- **Skilled tradespeople** in small businesses where the licence or qualification rests with the individual.

## What the financial test looks like

Insurers underwriting key person cover assess:

- The key person's contribution to gross revenue.
- The proportion of net profit fairly attributable to the individual.
- Time and cost required to recruit and train a replacement.
- Whether the person holds business debt as guarantor or has signed personal guarantees.
- Whether the person is named in client contracts, supplier agreements, or regulatory licences.

See **AIA Priority Protection PDS** (Version 32, 9 November 2025), Section 8.12 (Business Safeguard Forward Underwriting), which requires `a written re-evaluation of your value to the business from a qualified accountant or valuer` for the key person business insurance event.

## Panel insurer definitions

**Acenda Insurance PDS** (27 September 2025), Glossary, defines `Key Person` as `an employee or business owner without whose knowledge or expertise the business would suffer material financial loss`. Acenda also defines `Revenue Protection (Key Person) insurance` separately as `insurance to protect a business or employer against financial loss that may result from the loss of service of a key person due to their death, sickness or injury`.

**OnePath OneCare PDS** (October 2025), Future Insurability section, requires the life insured to be `crucial to the operation of the business` and that the business `would suffer a financial loss if the life insured died or suffered disability`.

**Encompass Protection PDS** (26 September 2025) explicitly references `revenue protection (key person) insurance if you're considered as such in the business` in its business-event trigger.

## Who does not qualify

- **Clients, suppliers, or other external parties.** The insurable interest must rest with the business, not external relationships.
- **Junior employees without revenue or strategic responsibility.** A receptionist or general office worker would not typically meet the financial test.
- **Family members not actively involved.** A spouse listed on company records but not engaged operationally does not qualify.
- **Temporary contractors** without a multi-year integral relationship to revenue.

## How insurers test 'key person' status at application

At application, the underwriter expects:

- A key-person valuation report from the business's accountant or business valuer.
- 2 to 3 years of business financial statements showing the person's contribution.
- A job description and explanation of responsibilities.
- Tax returns of the business and (for owners) of the individual.

Without this documentation, the cover may be issued at smaller-than-requested sum insured or with a financial-evidence loading.

This is general advice only. Whether a specific employee or owner qualifies as a key person depends on the business's structure, the insurer's underwriting view, and the documentation provided. Discuss with a registered tax agent and a licensed insurance adviser before lodging an application.

Question 3

How is key person insurance different from personal life insurance?

Accepted Answer

**Key person insurance is owned by the business and pays the business. Personal life insurance is owned by an individual and pays the individual's nominated beneficiaries.** Ownership, beneficiary, purpose, and tax treatment all differ.

The underlying insurance product (Life, TPD, Trauma) is often identical. The structural wrapper around it determines whether the cover is key person or personal.

## Side-by-side comparison

| Feature | Key person insurance | Personal life insurance |
|---|---|---|
| Policy owner | The business (company, partnership, trust) | The individual |
| Premium payer | The business | The individual (or their employer as a benefit) |
| Beneficiary on claim | The business | Nominated family or estate |
| Purpose | Protect business from financial loss | Protect family from financial hardship |
| Tax on premium | Revenue purpose: deductible. Capital purpose: not deductible | Generally not deductible (outside super) |
| Tax on proceeds | Revenue purpose: assessable income. Capital purpose: generally exempt under ITAA 1997 s118-37(1)(a) | Generally tax-free to original beneficial owner |
| Portability on departure | Stays with the business; may be cancelled or transferred | Stays with the individual permanently |

## Tax treatment is the most material practical difference

The Commissioner's view in **ATO Taxation Ruling TR 2009/2** sets the framework: tax treatment of key person cover depends on whether the cover is held for revenue or capital purposes. Revenue-purpose key person cover (replacing lost business income) gets deductible premiums and assessable proceeds. Capital-purpose key person cover funds recruitment, pays off business debt, or buys out a shareholder's equity. Premiums are not deductible. Proceeds are generally exempt under **ITAA 1997 s118-37(1)(a)** (CGT exemption for life insurance policy proceeds to the original beneficial owner).

Personal life insurance owned outside super sits under different rules. Premiums are generally not deductible (income protection is the exception under **ATO TR 95/35**). Lump-sum death proceeds paid to family members from a personally owned policy are generally tax-free.

## Ownership and control

Key person cover:

- The business decides whether to continue, transfer, or cancel cover at any time.
- The business is named as Policy Owner on the application.
- The business controls the claim process and receives the proceeds.
- If the key person leaves the business, the cover does not transfer with them.

Personal life insurance:

- The individual controls the cover entirely.
- The individual nominates beneficiaries (subject to binding-nomination rules inside super).
- The cover follows the individual across jobs and life changes.

## Purpose at claim

Key person cover proceeds typically fund:

- Recruitment, executive search fees, training of a replacement.
- Lost revenue while the business adjusts.
- Repayment of business loans (especially where the key person was guarantor).
- Buy-out of the deceased owner's equity (where structured with a buy/sell agreement).

Personal life insurance proceeds typically fund:

- Mortgage discharge.
- Children's education.
- Household living expenses for surviving family.
- Funeral and estate-administration costs.

## Why a business often holds both

A business owner who is also a key person may have:

- Personal life insurance for the family (typically outside super or owned by the spouse).
- Key person insurance for the business (owned by the company or partnership).
- TPD inside super for retirement-account protection (any-occupation definition).

Each policy addresses a different risk and a different beneficiary. The premium for each is paid by the appropriate party.

## Regulatory anchors

Key person and personal life insurance contracts both sit under the **Life Insurance Act 1995 (Cth)** and the **Insurance Contracts Act 1984 (Cth)**. Tax treatment turns on **ATO TR 2009/2**, **ITAA 1997 s8-1**, **ITAA 1997 s118-37(1)(a)**, and (for IP) **ATO TR 95/35**.

This is general advice only. Tax outcomes depend on business structure, cover purpose, and ownership. Discuss the structure with a registered tax agent and a licensed insurance adviser before taking out cover.

Question 4

What types of coverage are included in key person insurance policies?

Accepted Answer

**Four cover types can be structured as key person cover: Life, TPD, Trauma (Critical Illness), and Business Expenses or Income Protection.** The right mix depends on the financial risk being covered.

Key person cover is a use case overlaid on standard panel insurance products. No insurer sells a separate 'key person product'; they sell standard cover types that the business owns on the key person's life.

## The four cover types in business context

### 1. Life Cover (lump sum on death or terminal illness)

Paid to the business on death of the key person. Funds recruitment, revenue replacement, debt repayment, or shareholder buy-out. The most common base layer of key person cover. Available across all 9 panel insurers.

### 2. TPD Cover (lump sum on total and permanent disability)

Paid if the key person becomes permanently unable to work. Funds the same outcomes as Life cover when the key person survives but cannot return. Available across all 9 panel insurers. Note **SIS Regulation 4.07D**: own-occupation TPD inside super is not available for new cover since 1 July 2014; for key person purposes where own-occ matters, structure outside super.

### 3. Trauma or Critical Illness Cover (lump sum on diagnosis)

Paid on diagnosis of a defined medical event. Useful where the key person is likely to survive but recovery takes 12 to 24 months. The lump sum funds interim management or debt service while the person recovers. Available across all 9 panel insurers, but only outside super for new cover post 1 July 2014 (SIS sole-purpose test under **SIS Act 1993 s62**).

### 4. Business Expenses or Income Protection Cover (monthly benefit)

Reimburses fixed business overheads (rent, lease, wages, utilities) while the key person is disabled. Typical benefit period is 12 months. Critical for businesses with high fixed costs that continue running even when the key person cannot.

## Panel availability of Business Expenses cover

| Insurer | Business Expenses cover |
|---|---|
| AIA | Business Expenses Plan (Section 6, Ordinary Plan only) |
| Zurich | Zurich Business Expenses (standalone product, includes key person replacement variant) |
| TAL | Business Expense Option (Income Protection add-on) |
| OnePath | Business Expense Cover (PDS Section, $60,000 per month max) |
| ClearView | Business Expense Cover (outside super only, excluded for Class C/CC occupations) |
| Acenda | Business Expenses + Business Expenses Platinum Option |
| NEOS | **Not offered as standalone cover** |
| Encompass | **Not offered as standalone cover** |
| Futura | **Not offered as standalone cover** |

See **AIA Priority Protection PDS** (Version 32, 9 November 2025), Section 6 (Business Expenses Plan); **Zurich Wealth Protection PDS** (1 November 2025), Zurich Business Expenses section (`Business expenses cover provides a monthly benefit that reimburses either allowable business expenses or key person replacement costs`); **Acenda Insurance PDS** (27 September 2025), page 34.

## Trauma cover product names across the panel

- **AIA Crisis Recovery** (the AIA name for Trauma; Ordinary Plan only)
- **Zurich Wealth Protection Trauma** (with Trauma Plus partial-payment option)
- **TAL Critical Illness Insurance Plan** (PDS Section 2.3)
- **OnePath OneCare Trauma** (Comprehensive and Premier tiers)
- **ClearView ClearChoice Trauma**
- **NEOS Critical Illness Cover**
- **Encompass Critical Illness Cover**
- **Acenda Critical Illness**
- **Futura Critical Illness Cover**

Condition lists and qualifying periods vary between products. **Zurich Wealth Protection PDS** records 43 full-benefit conditions plus 13 partial-benefit conditions; TAL's product lists around 40 conditions. Survival periods are typically 14 days. Review the relevant PDS before selection.

## How cover combinations are structured

Most key person packages combine:

- **Life + TPD**: protects against death and permanent disability (a common base).
- **Life + TPD + Trauma**: adds short-term disruption protection from critical illness.
- **Life + TPD + Business Expenses**: for businesses with high fixed overheads.
- **Life + TPD + Trauma + Business Expenses**: full coverage for high-revenue-dependence businesses.

Each cover within the package can have a different sum insured and a different documented purpose (revenue vs capital). Maintaining separate documentation simplifies tax administration.

## Regulatory anchors

All panel cover sits under the **Life Insurance Act 1995 (Cth)** and the **Insurance Contracts Act 1984 (Cth)**. Tax treatment turns on **ATO TR 2009/2**. SIS restrictions on TPD inside super come from **SIS Regulation 4.07D**; Trauma inside super sits under **SIS Act 1993 s62** sole-purpose test.

This is general advice only. Cover mix and structure depend on business circumstances, the key person's role, and tax position. Discuss with a registered tax agent and a licensed insurance adviser before applying.

Question 5

How much key person insurance coverage should my business have?

Accepted Answer

**The coverage amount should reflect the financial loss the business would suffer on the key person's death or disability, supported by accountant-prepared evidence.** Most insurers will accept sums calculated using one of five recognised methods.

Key person cover at meaningful sums (typically $500,000 and above) requires financial underwriting. The insurer wants to see how the figure was derived before issuing cover.

## Five common calculation methods

### 1. Multiple of income method

- Multiply the key person's annual salary or remuneration package by a factor of 5 to 10.
- For senior or revenue-critical roles, factors up to 20 may be supportable with financial evidence.
- **Example**: a key person earning $200,000 per year, multiplied by 8, gives a sum insured of $1,600,000.
- Simple to calculate. Useful where the person's contribution is clearly tied to remuneration.

### 2. Replacement cost method

- Total the cost of recruiting, hiring, and training a replacement.
- Components: executive search fees (typically 25 to 33% of first-year salary), signing bonus, relocation, training (12 to 24 months), productivity gap while new hire ramps up.
- Useful where recruitment costs are the dominant exposure.

### 3. Contributions to earnings method

- Average the net profit of the business over 3 to 5 years.
- Identify the share fairly attributable to the key person.
- Multiply by the number of years to train a replacement.
- **Example**: average net profit $1,000,000; key person attributable share 40%; replacement timeline 3 years; sum insured $1,200,000.

### 4. Proportion of profits method

- A more complex variant of method 3.
- Considers the key person's salary, annual profit contribution, and the recovery timeline as a single calculation.
- Used at higher sums insured where the insurer wants a granular justification.

### 5. Debt protection method

- Match the sum insured to outstanding business debt the key person has signed for or guaranteed.
- Useful when the lender requires key person cover as a loan condition.
- For amortising loans, the cover may be reduced annually to match the declining balance.

## Per-insurer maximum sum insured

| Insurer | Maximum Life Cover for key person purpose |
|---|---|
| AIA | No general limit on Life Cover; Business Safeguard Forward Underwriting max $10M (TPD capped at $5M, Crisis Recovery at $2M) |
| Acenda | No general max but special terms apply above $15M; Business Safeguard Option max for Life Cover is `three times your original insurance amount, or $15 million` |
| Zurich | Subject to individual assessment; automatic-increase cap for business cover events is $15M for the death benefit |
| TAL | Any financially justifiable amount; Business Insurance Option max $1M per event under standard tiers |
| OnePath | Individual circumstances; Future Insurability business events cap at $200,000 per event |
| Futura | $15,000,000 Life Cover cap; Future Increase Benefit business events cap at $200,000 per event |
| Encompass | $7,000,000 Life Cover cap; Future Increase Benefit cap at $200,000 per event |
| NEOS | $5,000,000 Life Cover cap at commencement; Future Increase Benefit cap at $200,000 per event |
| ClearView | Subject to individual assessment |

See **AIA Priority Protection PDS** (Version 32, 9 November 2025), Section 8.12, page 157 (Business Safeguard Forward Underwriting); **Acenda Insurance PDS** (27 September 2025), pages 56 to 58 (Business Safeguard Option); **Zurich Wealth Protection PDS** (1 November 2025), business cover events section; **TAL Accelerated Protection PDS** (12 December 2024), Guaranteed Future Insurability Benefit section.

## Documentation expected at financial underwriting

For sums above approximately $1 million, the insurer typically requires:

- 2 to 3 years of audited business financial statements.
- Business Activity Statements (BAS) for the same period.
- Tax returns of the business and of the key person.
- Accountant-prepared key person valuation report explaining the contribution figure.
- Shareholding, partnership, or trust structure documentation.
- Job description and explanation of specialist qualifications or licences.
- Buy/sell agreement, share purchase agreement, or business succession agreement (where applicable).
- Bank loan documents (where the cover is for debt protection).

See **AIA Priority Protection PDS**, Business Safeguard Forward Underwriting evidence requirements; **OnePath OneCare PDS** (October 2025), evidence requirements; **Encompass Protection PDS** (26 September 2025), application evidence.

## Review cadence

Cover should be reviewed annually and whenever a trigger event occurs:

- Material revenue change.
- New debt or repayment of existing debt.
- The key person's role expands or contracts.
- Ownership structure changes.
- A new key person joins the business.

Under-insurance after rapid revenue growth is a common failure mode. Over-insurance is rare but possible after restructuring or downsizing.

This is general advice only. Sum insured calculations depend on business circumstances, the key person's role, and lender or contractual requirements. Discuss with a registered tax agent, an accountant, and a licensed insurance adviser before applying.

Question 6

Are key person insurance premiums tax deductible for my business?

Accepted Answer

**Deductibility depends on cover purpose, not cover type. Revenue-purpose key person premiums are deductible; capital-purpose key person premiums are not.** The Commissioner of Taxation's view in **ATO Taxation Ruling TR 2009/2** sets the framework.

The legal form of the cover (Life, TPD, Trauma, Income Protection, Business Expenses) does NOT determine deductibility. The PURPOSE the proceeds will fund is what matters.

## Revenue purpose vs capital purpose: the tax difference

| Element | Revenue purpose | Capital purpose |
|---|---|---|
| Premium deductibility | Deductible under ITAA 1997 s8-1 | Not deductible |
| Proceeds tax treatment | Assessable as ordinary income | Generally exempt under ITAA 1997 s118-37(1)(a) (CGT exemption for life policy proceeds to original beneficial owner) |
| Typical use | Replace lost business income, cover ongoing operating costs | Fund recruitment, repay debt, buy out shareholder equity |
| Example covers | Business Expenses, IP-style key person cover | Life cover for buy/sell, debt protection, capital replacement |

## What 'revenue purpose' looks like

The Commissioner treats cover as held for revenue purposes where the proceeds replace amounts that would otherwise be assessable income. Common examples:

- **Business Expenses Cover** reimbursing rent, utilities, employee salaries while the key person is disabled.
- **IP-style key person cover** paying a monthly benefit to replace lost revenue while the business recruits.
- **Short-term revenue replacement** structures using Life or TPD where the documented intent is to replace 1 to 3 years of lost profit.

Premiums are deductible under **ITAA 1997 s8-1** (general deductions). Proceeds are assessable income to the business and taxed at the corporate rate.

## What 'capital purpose' looks like

Cover is held for capital purposes where the proceeds fund a capital outcome rather than income replacement. Common examples:

- **Buy/sell funding** under a shareholder agreement (proceeds buy out the deceased owner's equity).
- **Debt protection** paying off business loans on death or disability of a guarantor.
- **Recruitment funding** paying executive search and training of a replacement.
- **Equity protection** preserving the value of the business by removing dependency on the key person.

Premiums are NOT deductible. Proceeds to the original beneficial owner are generally exempt from CGT under **ITAA 1997 s118-37(1)(a)**. That section provides a CGT exemption for life insurance policy proceeds where the recipient is the original beneficial owner.

## ATO source documents to cite at audit

- **ATO TR 2009/2** *Income tax: deductibility of premiums paid for an insurance policy against the loss of profits, key persons and trauma insurance* (the canonical capital-vs-revenue framework).
- **ATO TR 95/35** *Income tax: deductibility of income protection insurance premiums* (relevant where key person cover is structured as IP).
- **ATO TD 94/35** *Income tax: are premiums of an insurance policy for funding a buy-sell agreement deductible* (the position on buy/sell premiums).
- **ATO TR 85/36** *Income tax: receipts of insurance proceeds* (general framework for the assessability of insurance proceeds).
- **ATO TR 2003/9** *Income tax: insurance industry (life insurance policies)* (industry-level framework for life policies).

The **ATO website page** *Insurance premiums - key person and revenue protection insurance* summarises the position for businesses.

## Single policy with split purpose

If one policy covers both purposes (e.g. a $2M Life policy where $1.5M is for buy/sell funding and $500,000 is for revenue replacement), the deductible component is the portion attributable to revenue purpose. Maintaining detailed records of the split is essential at audit. In practice, many businesses hold separate policies for each purpose to simplify the tax administration.

## What the PDSs say about tax

No panel insurer PDS makes tax representations on the deductibility of key person premiums. The standard wording defers to professional tax advice. **TAL Accelerated Protection PDS** (12 December 2024): `Tax may apply if the policy or insurance is taken out for business purposes and you should seek professional taxation advice`. **Acenda Insurance PDS** (27 September 2025) refers to `Business Expenses assessable as income and that part of the premium that relates to the benefit that replaces income is likely` deductible.

## How to evidence intent at application

Best practice is to prepare an accountant's letter at the time of application documenting:

- The intended purpose of the cover (revenue, capital, or both).
- The calculation method used to derive the sum insured.
- Where the proceeds will be applied if a claim occurs.

This evidence reduces ATO re-characterisation risk if the proceeds are later applied to a different purpose.

## Regulatory anchors

- **ITAA 1997 s8-1** (general deductions test).
- **ITAA 1997 s118-37(1)(a)** (CGT exemption for life insurance policy proceeds).
- **ATO TR 2009/2**, **ATO TR 95/35**, **ATO TR 85/36**, **ATO TR 2003/9**, **ATO TD 94/35**.

This is general advice only. Tax treatment is complex and depends on business structure (sole trader, partnership, company, trust), cover purpose, and policy ownership. Discuss with a registered tax agent and a licensed insurance adviser before taking out cover.

Question 7

What factors affect the cost of key person insurance premiums?

Accepted Answer

**Key person premiums turn on the same drivers as personal cover (age, occupation, health, smoking, cover type, sum insured) plus business-specific factors (revenue, financial evidence, ownership structure).** The largest movers are age and sum insured.

Key person cover uses standard panel pricing engines. Each insurer applies the same actuarial models used for individual retail cover, with additional financial-underwriting requirements at higher sums.

## The nine main premium drivers

### 1. Age of the key person

The single largest factor. A 35-year-old key person and a 55-year-old key person on the same cover can differ by 200% or more in annual premium. Older key persons face higher mortality and morbidity probabilities, which flow through to the premium.

### 2. Sum insured

Direct linear relationship at lower sums. At higher sums (typically above $5M for Life cover), incremental pricing tiers may apply and additional financial underwriting kicks in.

### 3. Cover type and structure

Life only is the cheapest base. Adding TPD increases the cost by approximately 30 to 50% on a like-for-like sum. Adding Trauma (Critical Illness) adds materially more. Business Expenses cover priced as a monthly benefit follows a separate rating engine.

### 4. Occupation class

Each panel insurer publishes an occupation guide. Professional and white-collar classes (P1, P2, A) attract the lowest premiums. Heavy-manual classes (M, X) attract the highest. ClearView is explicit that some Class C/CC occupations cannot access Business Expense Cover at all (**ClearView ClearChoice PDS** (13 May 2024, update 5 June 2025), occupation guide).

### 5. Smoking status

Non-smokers pay materially less than smokers across all panel insurers. The differential is typically 30 to 50% on a like-for-like quote.

### 6. Health status and medical history

Full medical underwriting at application. Pre-existing conditions can attract premium loadings, exclusions, or declined cover. The insurer reviews GP reports, specialist reports, and (above defined thresholds) medical examinations.

### 7. Premium structure (stepped vs level)

Stepped premiums start cheap and rise with age. Level premiums start higher and stay flatter to a stated trigger (often age 65). See **AIA Priority Protection PDS** (Version 32, 9 November 2025), Section 7; **Zurich Wealth Protection PDS** (1 November 2025), variable age-stepped section.

### 8. Waiting and benefit periods (for IP-style cover)

For Business Expenses or IP-style key person cover, a shorter waiting period and longer benefit period both increase the premium.

### 9. Number of key persons covered

A policy covering 3 key persons costs more than a policy on 1. Multi-life policies may attract small administrative discounts but the underlying risk premium scales linearly with each life insured.

## How business factors interact with the price

Beyond the personal-cover drivers, key person cover prices in:

- **Industry risk profile**: a construction business and a professional-services firm with identical key person ages may price differently if the industry exposure is material.
- **Business financials**: at higher sums, the insurer reviews the business's financial accounts. Volatile or declining financials may attract additional scrutiny.
- **Ownership structure**: company-owned, partnership-owned, and trust-owned policies attract identical premium rates. The ownership wrapper does not change the underlying actuarial risk.
- **Documentation at application**: a clearly evidenced key person valuation can result in a smoother underwriting process and faster issue.

## Where premium structure is documented across the panel

- **AIA Priority Protection PDS** (Version 32, 9 November 2025), Section 7 (Premium structure).
- **Zurich Wealth Protection PDS** (1 November 2025), variable age-stepped premium structure.
- **TAL Accelerated Protection PDS** (12 December 2024), premium section.
- **OnePath OneCare PDS** (October 2025), How premiums are calculated.
- **ClearView ClearChoice PDS** (13 May 2024, update 5 June 2025), premium structure.
- **NEOS Protection PDS** (6 December 2024), premium section.
- **Encompass Protection PDS** (26 September 2025), premium structure.
- **Acenda Insurance PDS** (27 September 2025), premium structure.
- **Futura Protection PDS** (1 October 2025), premium structure.

## Levers a business can use to reduce premium

1. **Right-size the cover**: avoid over-insurance. A defensible valuation method (Topic 4 above) prevents premium waste.
2. **Choose the cover mix carefully**: Life only is cheaper than Life + TPD + Trauma. If the budget is tight, prioritise the cover that addresses the largest financial risk.
3. **Use longer waiting periods on Business Expenses cover**: a 30-day waiting period costs materially more than a 90-day wait.
4. **Match the benefit period to the actual recovery timeline**: a to-age-65 benefit period is rarely needed for revenue replacement; 12 to 24 months may suffice.
5. **Compare across the panel**: identical cover structures can vary 30 to 50% between the cheapest and most expensive insurer for a given key person.
6. **Lock cover in early**: premiums for a 35-year-old key person are dramatically lower than for a 55-year-old. Securing cover before age and health changes is a structural saving.
7. **Maintain healthy lifestyle factors**: non-smoker rates apply to confirmed non-smokers; quitting smoking can result in a re-rating after a typical 12-month abstinence period.

## What does NOT reduce the premium

- Changing ownership structure (company, partnership, trust) is tax-driven, not price-driven.
- Claiming the cover is for capital purposes vs revenue purposes does not change the underlying premium (it changes the tax treatment).
- Volume discounts are not standard across the panel for key person cover.

This is general advice only. Actual premium quotes depend on the specific key person's age, health, occupation, smoking status, sum insured, and cover mix. Comparing 3 to 5 panel insurers on the same structure is the practical approach to finding value. Discuss with a licensed insurance adviser before locking in cover.

Question 8

Can my business insure multiple key people on one policy?

Accepted Answer

**Yes. Most panel insurers allow multiple key persons on one policy or through linked separate policies.** The right structure depends on each person's role, the documented purpose of each cover, and the tax position.

Multi-life key person arrangements are common in partnerships and family businesses. The choice between one policy and multiple policies turns on flexibility, administration, and tax record-keeping.

## Single policy vs separate policies: the trade-off

| Factor | Single multi-life policy | Separate policies per key person |
|---|---|---|
| Administration | Simpler (one renewal, one premium notice) | More renewals and notices |
| Customisation | Each life has its own sum insured but the structure tends to share features | Each life has its own structure, cover mix, waiting periods, benefit periods |
| Tax record-keeping | More complex if some lives are revenue purpose and others capital | Cleaner: each policy has its own documented purpose |
| Underwriting | Each life underwritten independently | Same: each life underwritten independently |
| Cost | Sometimes marginally lower administrative cost | Sometimes marginally higher administrative cost |
| Ownership flexibility | One owner for all lives | Different owners possible per policy (e.g. cross-owned in partnership) |

## When separate policies usually fit better

Separate policies make sense where:

- The lives are insured for different purposes (one revenue, one capital). Tax documentation is cleaner with separate policies.
- The lives need different cover mixes (one needs Life + TPD; another needs Life + TPD + Trauma + Business Expenses).
- The ownership needs differ (cross-owned in a partnership where each partner insures the others personally).
- The lives are insured at different sums insured with very different premium profiles.
- A buy/sell structure requires distinct policies per shareholder (see the buy/sell FAQ).

## When a single multi-life policy usually fits better

A single policy makes sense where:

- All lives are insured for the same purpose (e.g. all revenue replacement, or all debt protection).
- The administrative simplicity outweighs the customisation flexibility.
- The business prefers one renewal cycle and one premium debit.
- All lives are similar in age, role, and contribution profile.

## How the panel supports multi-life arrangements

Most panel insurers issue one Policy Schedule per life insured but allow these schedules to be grouped under a single Policy Owner (the business). The premium is calculated per life, then aggregated for the business.

- **AIA Priority Protection PDS** (Version 32, 9 November 2025) supports multiple lives under Ordinary Plan, each with their own benefit and premium.
- **Acenda Insurance PDS** (27 September 2025) supports multi-life arrangements under one Policy Owner; each life can have its own cover mix.
- **Zurich Wealth Protection PDS** (1 November 2025) supports multi-life under partnership and company ownership.
- **TAL Accelerated Protection PDS** (12 December 2024): `Individual`, `Trust`, `Company/business`, `Joint ownership` all support multi-life.
- **OnePath OneCare PDS** (October 2025) supports multi-life under company, trustee, or other legal entity ownership.

## Underwriting is always per life

Even on a single multi-life policy:

- Each life completes a full medical questionnaire.
- Each life is rated separately for age, health, occupation, smoking status.
- A loading or exclusion on one life does not affect the others.
- A declined cover on one life does not invalidate the cover on other lives.
- Each life is renewable separately if circumstances change.

## Cross-ownership structures for partnerships

In a partnership, the common structure is cross-ownership rather than business-ownership:

- **Partner A** takes out cover on **Partner B**, owning the policy personally.
- **Partner B** takes out cover on **Partner A**, owning the policy personally.
- On death of Partner A, the proceeds are paid directly to Partner B, who uses them to buy out Partner A's estate.

Cross-ownership preserves the **ITAA 1997 s118-37(1)(a)** CGT exemption for the original beneficial owner (each surviving partner receives proceeds from a policy they personally owned). It is the standard structure for buy/sell-funded partnerships. See **ATO TR 2003/9** for the framework.

## Practical considerations

- **Maintain a key person register**: a simple document listing each insured person, sum insured, purpose (revenue/capital), and policy reference. Update annually.
- **Review on personnel changes**: when a key person leaves, the cover on that life must be addressed (cancel, transfer, or repurpose). See the 'what happens if the key person leaves' FAQ.
- **Document purpose per life**: each life's cover should have a documented purpose tied to the ATO TR 2009/2 framework. The documentation supports the tax position if challenged.

## Regulatory anchors

- **Life Insurance Act 1995 (Cth)** governs all panel cover.
- **Insurance Contracts Act 1984 (Cth)** governs the contract terms.
- **ATO TR 2009/2** for tax treatment.
- **ITAA 1997 s8-1** for premium deductibility.
- **ITAA 1997 s118-37(1)(a)** for CGT exemption on proceeds.

This is general advice only. Multi-life structuring and ownership choices depend on the business structure, partnership agreements, tax position, and each key person's role. Discuss with a registered tax agent and a licensed insurance adviser before structuring multi-life cover.

Question 9

What happens to key person insurance if the key person leaves the company?

Accepted Answer

**When a key person leaves, the business owns the policy and decides whether to cancel, transfer, or maintain it.** The cover does not follow the departing person.

Key person policies are owned by the business and held on the life of a specific individual. When that individual exits, the policy continues to exist, but the rationale for holding it usually changes.

## The four options at departure

### 1. Cancel the policy

The simplest path when the departing person was the sole reason for the cover. The business stops paying premiums; the policy lapses. No refund of past premiums; the cover is extinguished. Suits a clean exit where no buy/sell trigger has fired and no business debt depends on the cover.

### 2. Transfer ownership to the departing individual

The business assigns the policy to the departing person, who then owns it personally and pays future premiums. Stamp duty considerations may apply depending on the state and the policy type. Assignment is typically only practical for Life or Life + TPD cover. Assigning Business Expenses cover rarely makes sense because the cover is structured for business overheads, not personal income.

### 3. Keep the policy in force temporarily

Useful where the departing person retains a consultancy or transition role and the business still depends on them. The business continues paying premiums until the transition is complete. Document the residual rationale in case ATO or insurer queries arise.

### 4. Repurpose the policy for a new key person

This is rarely available as a true 're-targeting'. The policy is held on a specific life (the departing person). A new key person joining the business would typically need a fresh policy with new underwriting based on their age, health, and role. The original policy can be cancelled and replaced rather than 'transferred'.

## Special considerations by departure scenario

### Voluntary departure (resignation, retirement)

- The business has time to plan the cover transition.
- Buy/sell triggers usually do not fire (unless retirement is a defined trigger in the agreement).
- Standard options: cancel, assign to the individual, or maintain for transition period.

### Termination or dismissal

- The business should generally cancel cover unless the person remains a guarantor of business debt.
- Confirm the cover is not required as a condition of any outstanding business loan before cancelling.

### Death

- The policy is the claim trigger, not a departure scenario.
- Proceeds are paid to the business as policy owner.
- Apply proceeds to the documented purpose (revenue replacement, buy-out, debt protection).

### Disability

- TPD or Critical Illness claim triggers if the person meets the policy definition.
- Proceeds paid to the business.
- The individual may also have personal IP or TPD cover (separate from key person cover).

### Sale of the business

- Existing key person cover typically does not transfer to the new owners.
- The selling business cancels cover at completion.
- New owners arrange their own key person cover on the individuals they identify as critical.

## Documentation to update at departure

- **Buy/sell agreement**: if cover supported a buy/sell, the agreement may require the cover to be cancelled, reassigned, or replaced.
- **Loan agreements**: if cover was a loan condition, notify the lender before cancelling. The lender may require replacement cover.
- **Partnership or shareholder agreement**: confirm what the agreement says about insurance handover on partner departure.
- **Key person register**: remove the departing person; consider whether a successor needs new cover.

## PDS evidence of departure handling

No panel PDS specifies departure procedures because the policy is between the insurer and the policy owner (the business). The business decides. The standard policy terms allow:

- Cancellation at any time by the policy owner (refund of unearned premium per the standard short-rate scale; check each PDS).
- Assignment to a third party with insurer consent (e.g. assignment from the business to the departing individual).
- Continuation under the existing terms with no change required (premiums must continue to be paid by the named policy owner).

See **AIA Priority Protection PDS** (Version 32, 9 November 2025), Section 7 (Cancellation); **Zurich Wealth Protection PDS** (1 November 2025), policy cancellation and assignment sections; **Acenda Insurance PDS** (27 September 2025), assignment section.

## Why a portability option is rarely available

Key person cover is structured for business benefit. The individual is the life insured but not the policy owner. Some retail products include a portability or conversion option that converts business-owned cover into personally owned cover; this is uncommon in the key person context and typically requires fresh underwriting.

## Common considerations

- **Do not cancel before checking lender consent**: bank-required key person cover that secures business debt cannot be cancelled without lender approval.
- **Document the decision**: the cancellation, assignment, or continuation decision should be documented and dated.
- **Notify the insurer in writing**: cancellation or change of ownership must be communicated to the insurer; do not just stop paying premiums.
- **Tax position on assignment**: assignment from business to individual may have CGT implications under **ITAA 1997 s118-37** depending on the original ownership. Discuss with a registered tax agent.

## Regulatory anchors

- **Insurance Contracts Act 1984 (Cth)**: governs the policy contract terms.
- **Life Insurance Act 1995 (Cth)**: defines the legal character of the cover.
- **ITAA 1997 s118-37**: governs the CGT position on assignment or claim.

This is general advice only. The right action when a key person leaves depends on business circumstances, contractual obligations, and the documented purpose of the cover. Discuss with a registered tax agent, the business's solicitor, and a licensed insurance adviser before taking action.

Question 10

Do banks require key person insurance for business loans?

Accepted Answer

**Yes, many Australian banks require key person insurance as a condition of business loans, particularly where the loan is secured against personal assets.** Cover gives the lender comfort that debt can be repaid.

Lender-required key person cover is one of the most common reasons businesses take out the cover in the first place. Treating it as a compliance step rather than a discretionary purchase often shapes the sum insured and the documentation.

## When lenders typically require cover

Lender requirements vary by institution and loan type, but common triggers include:

- **Small to medium business loans** where one or two individuals are critical to revenue.
- **Loans secured against personal assets** (the family home is the classic example).
- **Director or guarantor loans** where personal guarantees back the business debt.
- **Asset-finance loans** for high-value equipment where the operator's expertise is essential.
- **Franchise finance** where the franchisee's individual capability is part of the lending decision.
- **Equipment finance** for specialised assets requiring licensed operators.

Not every business loan requires cover. Loans secured against fully serviceable commercial property with low loan-to-value ratios may not trigger the requirement. Check the loan offer or term sheet for the explicit clause.

## What a typical loan-condition clause looks like

Loan documents typically include trigger event clauses requiring:

- Notification of the lender if a director, principal, or guarantor dies or becomes disabled.
- Insurance on the named key persons for at least the loan amount.
- The policy to remain in force for the duration of the loan.
- Assignment of the policy proceeds to the lender, or naming the lender as a loss payee.
- A right of acceleration: the lender may demand immediate repayment on the trigger event.

## Sum insured matching to loan exposure

The sum insured should match the loan amount as a minimum. Many businesses size cover higher to also fund:

- The business disruption that follows the key person's loss.
- Recruitment of a replacement.
- Working-capital buffer during the transition.

**Example**: a $1.5M business loan with personal guarantee from a 45-year-old key person. Lender requires $1.5M cover for debt protection (capital purpose). Business may choose to also hold $1M revenue-protection cover on the same person (revenue purpose) for business continuity. Total cover: $2.5M.

## Amortisation: should cover reduce as the loan is paid down?

For a loan that amortises over 10 to 20 years, the outstanding balance falls each year. Two approaches:

- **Fixed cover**: the business holds $1.5M cover throughout the loan term. Cover exceeds the outstanding balance in later years; the excess can fund disruption or working capital.
- **Reducing cover**: the cover is reviewed annually and reduced to match the outstanding balance. Premium is lower, but no buffer exists for disruption costs.

For revolving facilities and lines of credit, fixed cover is the standard approach because the balance can rise back to the original limit at any time.

## Tax treatment of debt-protection cover

Debt-protection cover is generally classified as capital purpose under **ATO Taxation Ruling TR 2009/2**:

- **Premiums NOT deductible** (capital purpose).
- **Proceeds generally exempt** under **ITAA 1997 s118-37(1)(a)** (CGT exemption for life insurance policy proceeds to the original beneficial owner).
- The proceeds discharge a capital liability (the loan), not replace income.

If the cover is structured to also fund revenue replacement (typical in mixed-purpose policies), the revenue-purpose portion of the premium may be deductible. Document the split.

## Documentation the lender typically requires

- **Copy of the policy schedule** showing the business as policy owner and the lender's interest.
- **Confirmation from the insurer** that the cover is in force and the premium is current.
- **Notification on renewal** that the cover remains in place.
- **Notification on lapse, change, or claim**: most loan clauses require the borrower to notify the lender of any change.

Some lenders take an assignment of the policy proceeds directly. Others register a charge over the policy. Some simply require the borrower to maintain cover at a stated sum and provide annual confirmation.

## PDS evidence of loan-protection structuring

- **AIA Priority Protection PDS** (Version 32, 9 November 2025), Section 8.12 (Business Safeguard Forward Underwriting) explicitly recognises `for loan guarantee or debt protection business insurance purposes - the increase in the amount of the business loan and other particulars about the loan` as a business event triggering future-increase capacity.
- **Zurich Wealth Protection PDS** (1 November 2025): `key person insurance, loan/guarantor protection, buy-sell/shareholder or partnership protection` are all recognised business cover events.
- **Acenda Insurance PDS** (27 September 2025), Business Safeguard Option (pages 56 to 58), includes loan-guarantee increases with a six-month accident-only restriction during the first six months after a loan-guarantee increase.
- **Encompass Protection PDS** (26 September 2025): `asset protection (loan guarantee) insurance` is a recognised business-event trigger for future-increase capacity.

## What happens at claim time

On death or TPD of the key person:

1. Business (policy owner) notifies the insurer and lender.
2. Insurer processes the claim per standard requirements (death certificate, medical evidence, etc.).
3. Proceeds are paid to the business or directly to the lender if an assignment is in place.
4. Loan is discharged (in whole or in part) per the loan agreement.
5. Any surplus over the loan balance remains with the business.

Without the cover, the lender may demand immediate repayment, forcing asset sales or restructuring during a period when the business is already in disruption.

## Common considerations

- **Read the loan terms before signing**: identify the cover requirement clauses, sum insured, and notification obligations.
- **Build cover quoting into the loan application**: insurance underwriting takes 2 to 6 weeks; building it into the loan timeline avoids delays.
- **Maintain cover for the full loan term**: lapses during the loan term can constitute default.
- **Review cover at refinance**: changing the loan structure (new lender, larger facility, different guarantors) may require re-sized cover.
- **Coordinate with revenue-purpose cover**: many businesses hold both debt-protection (capital purpose) and revenue-replacement (revenue purpose) on the same key person.

## Regulatory anchors

- **Insurance Contracts Act 1984 (Cth)**: governs the policy contract.
- **Life Insurance Act 1995 (Cth)**: governs the legal character of the cover.
- **ATO TR 2009/2**: classifies debt-protection cover as capital purpose.
- **ITAA 1997 s118-37(1)(a)**: CGT exemption for proceeds to the original beneficial owner.

This is general advice only. Lender requirements vary by institution, loan type, and borrower. Discuss specific loan requirements with the lender, your accountant, and a licensed insurance adviser before taking out cover.

Key Person Insurance FAQs

Basics

What is key person insurance and how does it work?

Who qualifies as a 'key person' in a business?

How is key person insurance different from personal life insurance?

What is the difference between revenue purpose and capital purpose key person insurance?

Is key person insurance mandatory for businesses in Australia?

What documentation is required when applying for key person insurance?

How does business structure affect key person insurance arrangements?

Are there alternatives to traditional key person insurance for small businesses?

What is the difference between key person insurance and shareholder protection insurance?

How does the General Advice Warning apply to key person insurance information?

Claims

What is the key person insurance claims process?

Can key person insurance proceeds be used for any business purpose?

What is the typical payout timeline for key person insurance claims?

Cost

Are key person insurance premiums tax deductible for my business?

What factors affect the cost of key person insurance premiums?

What happens to key person insurance premiums if the key person's health deteriorates?

Can key person insurance premiums be paid from business funds or do they require personal payment?

How does Key Person Insurance integrate with the Small Business CGT concessions?

Coverage

What types of coverage are included in key person insurance policies?

How much key person insurance coverage should my business have?

Can my business insure multiple key people on one policy?

What happens to key person insurance if the key person leaves the company?

Do banks require key person insurance for business loans?

How does key person insurance integrate with business succession planning?

How often should key person insurance coverage be reviewed?

How does key person insurance work for business partnerships?

Can key person insurance cover temporary or contract workers?

How does key person insurance interact with other business insurance policies?

What role does key person insurance play in business valuation and sales?

How does key person insurance work for businesses with equal partners who are all equally critical?

What happens to key person insurance coverage when a business expands interstate or internationally?

How should businesses handle key person insurance when implementing remote work or flexible work arrangements?

Which insurer products are commonly used for key person trauma cover in Australia?

How does key person insurance support a buy/sell agreement?

Can key person insurance be used to fund business debt protection?

What happens if the key person changes role within the business or leaves entirely?

Can Key Person Insurance cover trauma or critical illness diagnoses?

How is Key Person Insurance sum insured calculated for a sole-founder business?

Exclusions

What exclusions and limitations apply to key person insurance policies?

What happens if a key person has pre-existing medical conditions?

Key Person Insurance FAQs

Basics

What is key person insurance and how does it work?

Who qualifies as a 'key person' in a business?

How is key person insurance different from personal life insurance?

What is the difference between revenue purpose and capital purpose key person insurance?

Is key person insurance mandatory for businesses in Australia?

What documentation is required when applying for key person insurance?

How does business structure affect key person insurance arrangements?

Are there alternatives to traditional key person insurance for small businesses?

What is the difference between key person insurance and shareholder protection insurance?

How does the General Advice Warning apply to key person insurance information?

Claims

What is the key person insurance claims process?

Can key person insurance proceeds be used for any business purpose?

What is the typical payout timeline for key person insurance claims?

Cost

Are key person insurance premiums tax deductible for my business?

What factors affect the cost of key person insurance premiums?

What happens to key person insurance premiums if the key person's health deteriorates?

Can key person insurance premiums be paid from business funds or do they require personal payment?

How does Key Person Insurance integrate with the Small Business CGT concessions?

Coverage

What types of coverage are included in key person insurance policies?

How much key person insurance coverage should my business have?

Can my business insure multiple key people on one policy?

What happens to key person insurance if the key person leaves the company?

Do banks require key person insurance for business loans?

How does key person insurance integrate with business succession planning?

How often should key person insurance coverage be reviewed?

How does key person insurance work for business partnerships?

Can key person insurance cover temporary or contract workers?

How does key person insurance interact with other business insurance policies?

What role does key person insurance play in business valuation and sales?