Equal partners typically structure key person cover with parallel policies on each partner, sized to similar coverage amounts, with cross-ownership or business-ownership depending on tax and buy/sell objectives. The cover typically combines revenue protection (operational continuity) with capital protection (funded equity buyout).
This is one of the most common Key Person structuring scenarios in Australia. The structural choices depend on the number of partners, the partnership agreement, the relative value of each partner, and the tax-efficiency objectives.
The two main structural choices
All 9 panel insurers (AIA, Zurich, TAL, OnePath, ClearView, NEOS, Encompass, Acenda, Futura) accept both structures.
Structure A: Cross-insurance
Each partner takes out a Life policy on each other partner. With 3 equal partners (A, B, C):
- A insures B (sum insured = B's share value).
- A insures C (sum insured = C's share value).
- B insures A and C.
- C insures A and B.
Result: 6 policies, each owned by one partner on another partner's life.
On death of A: B and C receive the proceeds (B owns one policy on A; C owns one policy on A). B and C use the proceeds to buy out A's estate.
Pros:
- Clean s118-37 CGT exemption (each policy owner is the original beneficial owner).
- Surviving partners immediately receive buyout funds.
- Simple at the 2 and 3 partner scale.
Cons:
- Number of policies grows combinatorially (4 partners = 12 policies).
- Premiums for older partners may fall disproportionately on younger partners.
- Re-structuring on partner exit or new-partner admission is complex.
Structure B: Self-insurance (business-owned)
The partnership (or a related Insurance Trust or Bare Trust) owns one policy on each partner. With 3 equal partners:
- Partnership owns one policy on A.
- Partnership owns one policy on B.
- Partnership owns one policy on C.
Result: 3 policies, all owned by the business entity.
On death of A: the partnership receives the proceeds and buys back A's share from the estate.
Pros:
- Scales to many partners (1 policy per partner regardless of partner count).
- Consistent administration.
- Premium cost falls on the partnership, not on individual partners.
Cons:
- More complex tax treatment (proceeds to non-original-owner may lose CGT exemption).
- Requires careful trust deed drafting if held via Insurance Trust.
- Anti-avoidance scrutiny risk on the buyout transaction.
Cover-amount calculation for equal partners
A common approach for each partner's policy:
- Capital purpose component: equal to the partner's share of business value. For a partnership valued at $3 million with 3 equal partners, each partner's capital-purpose cover is $1 million.
- Revenue purpose component: 12 to 24 months of the partner's gross remuneration plus any direct attribution of revenue to the partner. For a partner earning $250,000 with directly attributable revenue of $500,000, this might be $500,000 to $1.5 million.
- Total per partner: $1.5 million to $2.5 million in this example.
The specific number depends on the partnership agreement's valuation methodology, the partners' relative roles, and the recruitment-cost assumptions. Most partnerships engage a business valuer or accountant to set the dollar amounts.
Business Safeguard Forward Underwriting for equal partners
Where the partnership grows over time, the cover should grow with the business value. The dedicated forward-underwriting mechanisms that allow this without re-underwriting:
- AIA Priority Protection PDS (Version 32, 9 November 2025), Section 8.12, page 157: Business Safeguard Forward Underwriting. Up to $10 million per cover; minimum $100,000 sum insured.
- Acenda Insurance PDS (27 September 2025), Business Safeguard Option (PDS pages 56-58): up to $15 million Life Cover, $5 million TPD (professional occupations) or $3 million TPD (other), $2 million Critical Illness. Acenda is the panel's most-developed mechanism.
- Zurich Wealth Protection PDS (1 November 2025): up to $15 million death benefit under business cover events.
- TAL Accelerated Protection PDS (12 December 2024): Business Insurance Option under Guaranteed Future Insurability Benefit, $1 million standard increase cap per business event.
- OnePath OneCare PDS (1 October 2025): Future Insurability business events, $200,000 per-event cap.
- NEOS Protection PDS (6 December 2024): Future Increase Benefit business events, $200,000 per-event cap.
- Encompass Protection PDS (26 September 2025): Future Increase Benefit business events, $200,000 per-event cap.
- ClearView ClearChoice PDS (13 May 2024, update 5 June 2025): Future Increase Benefit business events.
- Futura Protection PDS (1 October 2025): Future Increase Benefit business events, $200,000 per-event cap.
For equal partners structuring cover above the $200,000 per-event cap, AIA (Business Safeguard Forward Underwriting) and Acenda (Business Safeguard Option) provide the highest dedicated mechanisms.
The buy/sell agreement
Key person cover on equal partners is most useful when paired with a written buy/sell agreement. The agreement should specify:
- The trigger events (death, TPD, sometimes Critical Illness).
- The valuation methodology for the buyout (book value, fair market value, formula-based, agreed-value).
- The buyout mechanics (immediate lump sum, instalments, or a combination).
- Who receives the insurance proceeds (cross-insured surviving partners, or the business entity).
- How the buyout interacts with the deceased's estate (lump sum payment to estate vs share transfer to surviving partners).
The buy/sell agreement is typically drafted by a commercial lawyer in consultation with the partnership's accountant. The insurance structure should be aligned with the agreement at the time both are put in place.
Tax treatment for equal partners
The ATO TR 2009/2 framework applies:
- Revenue-purpose cover (operational continuity): premiums deductible under ITAA 1997 s8-1 (flowing through to partners per partnership share); proceeds assessable as partnership income.
- Capital-purpose cover (equity buyout): premiums NOT deductible; proceeds typically CGT-exempt under ITAA 1997 s118-37(1)(a) where the policy is owned by the original beneficial owner (the cross-insured partner in Structure A, or the partnership in Structure B).
For capital-purpose buyout proceeds, also consider the Small Business CGT concessions in Division 152 of the Income Tax Assessment Act 1997. Eligibility requires the partnership to meet the maximum-net-asset-value test ($6 million) or the small-business-entity test ($2 million aggregated turnover).
When equal partners are NOT genuinely equal
Many partnerships described as "equal" have substantial real differences in age, health, role, or revenue contribution. Where this is the case:
- Sum insured may need to differ between partners (the younger or higher-revenue partner may need lower cover relative to their share; the older or specialised partner may need higher cover).
- Cross-insurance becomes more sensitive to premium age-loading (the younger partner pays cheap premiums for cover on the older partner; the older partner pays expensive premiums for cover on the younger partner).
- Self-insurance through the partnership may be fairer because the premium pool is shared.
Discuss with a licensed adviser and your accountant before deciding the structure. The choice depends materially on the partnership economics and is rarely a pure technical answer.
This is general advice only.