Is key person insurance mandatory for businesses in Australia?

Key person insurance is not legally mandatory under Australian law. It is often required contractually by lenders, partnership agreements, and franchise deeds, making it effectively mandatory in those scenarios but not statutory.

This is general advice only. Engage a licensed insurance adviser and a solicitor to confirm what your specific contracts require.

The legal position

No statute requires Australian businesses to hold Key Person insurance. The relevant federal regimes do not impose insurance obligations on businesses for their employees or directors:

• Corporations Act 2001 does not require directors to be insured
• Income Tax Assessment Act 1997 does not require the business to hold cover (it governs how premiums and proceeds are taxed if cover is held)
• SIS Act 1993 governs super-held insurance but does not mandate it
• Insurance Contracts Act 1984 governs contract formation, not mandatory cover

Contractual requirements that operate like a mandate

In practice, four contract types frequently require Key Person cover:

Bank loan facilities

Lenders providing business loans, equipment finance, or commercial property loans often require Key Person Life cover (and sometimes TPD or Trauma) on directors, partners, or guarantors. The cover supports debt repayment if the key person dies or is disabled. Common terms:

• Cover at least equal to the outstanding loan balance
• Insurer assignment of proceeds to the lender, or notice of claim event
• Annual confirmation of policy in force
• Acceleration clause triggering full repayment on death of a guarantor unless cover is in place

Shareholders agreements and partnership deeds

Multi-owner businesses typically require cover to fund buy/sell obligations:

• Cross-owned policies where each owner insures the others
• Business-owned policies where the entity holds cover on each owner
• Insurance trust structures for larger ownership groups

The panel forward-underwriting mechanisms (AIA Business Safeguard Forward Underwriting, Section 8.12 of the AIA Priority Protection PDS 9 November 2025; Acenda Business Safeguard Option, pages 56 to 58 of the Acenda Insurance PDS 27 September 2025) all explicitly recognise buy/sell, share purchase, or business succession agreements as triggering business events.

Franchise agreements

Many franchisors require franchisees to hold Key Person cover on themselves, with the franchisor named as an interested party. This protects the franchisor's ongoing royalty stream.

Joint venture and partnership agreements

Large contracts (construction, infrastructure, professional services) often require Key Person cover on named individuals whose expertise the project depends on.

Why most advised businesses hold cover voluntarily

Even without a contractual trigger, businesses commonly hold cover where:

• One or two individuals drive a majority of revenue
• A founder holds critical client relationships or IP
• A specialist (engineer, surgeon, lead developer) holds a licence or qualification the business depends on
• Family business succession planning requires funded buyouts

The alternative funding sources (cash reserves, bank borrowing at the worst possible moment, asset sales) are usually inferior to insurance proceeds.

Tax framework still applies

Whether mandatory or voluntary, the same tax framework applies once cover is held. ATO Taxation Ruling TR 2009/2 splits premiums and proceeds into capital-purpose and revenue-purpose categories:

• Capital-purpose premiums not deductible under ITAA 1997 s8-1; proceeds generally not assessable, with CGT exemption under ITAA 1997 s118-37(1)(a) for original beneficial owner
• Revenue-purpose premiums deductible under s8-1; proceeds assessable as ordinary income

Supporting rulings: TR 2003/9, TD 94/35, TR 95/35, TR 85/36.

SIS Act limits on inside-super Key Person cover

If the cover is to be held inside an SMSF or retail super fund, the SIS Act 1993 s62 sole-purpose test bars business-purpose Key Person cover. SMSF-held Life cover is fine for personal estate planning of the owner, but the proceeds flow to the SIS dependant or estate, not to the business. SIS Regulation 4.07D also restricts inside-super TPD to the any-occupation definition since 1 July 2014, which is unsuitable for specialist key persons.