How much key person insurance coverage should my business have?

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.