How is key person insurance different from personal life insurance?

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.