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

Pre-existing medical conditions are assessed at application through full medical underwriting. Possible outcomes are standard rates, premium loading, specific exclusions, or declined cover. Non-disclosure of a known condition can void the policy under Insurance Contracts Act s20B.

The panel insurers apply the same medical underwriting to key person cover that they apply to personal cover. The difference is that the business (not the individual) is the policy owner and bears the financial consequences of any loading or exclusion.

The four possible underwriting outcomes

1. Standard rates: well-managed conditions, stable, low future-risk profile.
2. Premium loading: a percentage uplift on the base premium reflecting the risk. Loadings of 25%, 50%, 75%, 100%, or higher are common across the panel depending on condition severity.
3. Specific exclusion: cover issued with a clause excluding claims that arise from the named condition or related complications. For example, a known heart condition may attract an exclusion for cardiovascular events while other causes remain covered.
4. Decline: the insurer declines to issue cover where the risk exceeds underwriting appetite.

The duty to take reasonable care (s20B)

Since 5 October 2021, all applications fall under Insurance Contracts Act 1984 s20B, which replaced the previous "duty of disclosure" with a "duty to take reasonable care not to make a misrepresentation". The duty is owed by the applicant (and the life insured if different). The standard is reasonable care; the insurer must ask clear questions, and the applicant must answer honestly to the best of their knowledge.

Breach of s20B triggers a proportionate remedy under s28A to s28D:

• Fraudulent misrepresentation: insurer can avoid (rescind) the policy from inception.
• Non-fraudulent breach (negligent or innocent): insurer can adjust the cover, premium, or claim outcome to what would have applied with full and accurate disclosure. The insurer cannot rescind for non-fraudulent breach.

This matters at claim time. If the key person's pre-existing condition was not disclosed and the claim arises from that condition, the proportionate remedy reduces or denies the payout. The business as policy owner bears this loss.

What underwriting evidence the panel insurers request

The specific medical evidence required scales with the proposed sum insured and the applicant's age. For higher-band key person cover (typically $1 million+), the panel insurers commonly require:

• Complete medical history (GP records, specialist reports).
• Treating doctor's report (often within the last 6 to 12 months).
• Blood tests, ECG, blood pressure measurements.
• Specialist reports for any known condition.
• Personal Medical Attendant Report (PMAR) from the GP.
• For very high sums insured, an independent medical examination (IME) arranged by the insurer.

The evidence list per insurer is documented in each PDS. For example, AIA Priority Protection PDS (Version 32, 9 November 2025) Section 1 sets out the financial and medical underwriting requirements. Higher Business Safeguard Forward Underwriting bands (Section 8.12, page 157) attract additional financial evidence and re-evaluation of the key person's value.

Common conditions and typical outcomes

The panel insurers do not publish public underwriting matrices, but practitioner-level patterns include:

• Stable, well-controlled type 2 diabetes: standard or mild loading (25-50%).
• Treated and stable hypertension: standard or minimal loading.
• Anxiety or depression with full recovery and no current medication: standard rates typically achievable after 2-3 years stable.
• Active mental health condition with current medication: loading or mental health exclusion is common.
• History of cancer (5+ years stable, low recurrence risk): standard or mild loading depending on cancer type and treatment.
• History of cancer (recent, intermediate recurrence risk): loading, exclusion, or decline.
• Cardiovascular event (heart attack, bypass surgery): loading or cardiovascular exclusion is common.
• Active musculoskeletal condition affecting work capacity: TPD/IP exclusion for related claims is common.

Outcomes vary materially between the 9 panel insurers. A condition that one insurer loads at 50% may be standard at another or declined at a third. A broker who places business across multiple insurers can compare offers before binding.

What happens if cover is declined

If one or more panel insurers decline, options include:

• Approaching alternative panel insurers (a broker can ensure no declined applications are reported to the AFCA central database unless required).
• Restructuring the request (lower sum insured, shorter benefit period, different cover type).
• Waiting for a stable period (commonly 12 to 24 months) before re-applying.
• Exploring overseas-issued group cover (rare and complex).

What happens if the key person's health improves

Where a loading or exclusion was applied at issue and the key person's health subsequently improves (for example, smoking cessation, weight loss, condition resolution), the policy owner can request a premium review or exclusion review. Each insurer's PDS sets out the framework; outcomes are not guaranteed.

Tax position is unchanged

A loading or exclusion does not change the ATO TR 2009/2 capital-vs-revenue purpose framework. The business's premium deductibility (under ITAA 1997 s8-1 for revenue-purpose cover) and the proceeds CGT treatment (under ITAA 1997 s118-37(1)(a) for capital-purpose cover) depend on the documented purpose, not the underwriting outcome.

This is general advice only. Discuss specific health-condition circumstances and disclosure obligations with a licensed adviser before applying.