When a key person leaves, the business owns the policy and decides whether to cancel, transfer, or maintain it. The cover does not follow the departing person.
Key person policies are owned by the business and held on the life of a specific individual. When that individual exits, the policy continues to exist, but the rationale for holding it usually changes.
The four options at departure
1. Cancel the policy
The simplest path when the departing person was the sole reason for the cover. The business stops paying premiums; the policy lapses. No refund of past premiums; the cover is extinguished. Suits a clean exit where no buy/sell trigger has fired and no business debt depends on the cover.
2. Transfer ownership to the departing individual
The business assigns the policy to the departing person, who then owns it personally and pays future premiums. Stamp duty considerations may apply depending on the state and the policy type. Assignment is typically only practical for Life or Life + TPD cover. Assigning Business Expenses cover rarely makes sense because the cover is structured for business overheads, not personal income.
3. Keep the policy in force temporarily
Useful where the departing person retains a consultancy or transition role and the business still depends on them. The business continues paying premiums until the transition is complete. Document the residual rationale in case ATO or insurer queries arise.
4. Repurpose the policy for a new key person
This is rarely available as a true 're-targeting'. The policy is held on a specific life (the departing person). A new key person joining the business would typically need a fresh policy with new underwriting based on their age, health, and role. The original policy can be cancelled and replaced rather than 'transferred'.
Special considerations by departure scenario
Voluntary departure (resignation, retirement)
- The business has time to plan the cover transition.
- Buy/sell triggers usually do not fire (unless retirement is a defined trigger in the agreement).
- Standard options: cancel, assign to the individual, or maintain for transition period.
Termination or dismissal
- The business should generally cancel cover unless the person remains a guarantor of business debt.
- Confirm the cover is not required as a condition of any outstanding business loan before cancelling.
Death
- The policy is the claim trigger, not a departure scenario.
- Proceeds are paid to the business as policy owner.
- Apply proceeds to the documented purpose (revenue replacement, buy-out, debt protection).
Disability
- TPD or Critical Illness claim triggers if the person meets the policy definition.
- Proceeds paid to the business.
- The individual may also have personal IP or TPD cover (separate from key person cover).
Sale of the business
- Existing key person cover typically does not transfer to the new owners.
- The selling business cancels cover at completion.
- New owners arrange their own key person cover on the individuals they identify as critical.
Documentation to update at departure
- Buy/sell agreement: if cover supported a buy/sell, the agreement may require the cover to be cancelled, reassigned, or replaced.
- Loan agreements: if cover was a loan condition, notify the lender before cancelling. The lender may require replacement cover.
- Partnership or shareholder agreement: confirm what the agreement says about insurance handover on partner departure.
- Key person register: remove the departing person; consider whether a successor needs new cover.
PDS evidence of departure handling
No panel PDS specifies departure procedures because the policy is between the insurer and the policy owner (the business). The business decides. The standard policy terms allow:
- Cancellation at any time by the policy owner (refund of unearned premium per the standard short-rate scale; check each PDS).
- Assignment to a third party with insurer consent (e.g. assignment from the business to the departing individual).
- Continuation under the existing terms with no change required (premiums must continue to be paid by the named policy owner).
See AIA Priority Protection PDS (Version 32, 9 November 2025), Section 7 (Cancellation); Zurich Wealth Protection PDS (1 November 2025), policy cancellation and assignment sections; Acenda Insurance PDS (27 September 2025), assignment section.
Why a portability option is rarely available
Key person cover is structured for business benefit. The individual is the life insured but not the policy owner. Some retail products include a portability or conversion option that converts business-owned cover into personally owned cover; this is uncommon in the key person context and typically requires fresh underwriting.
Common considerations
- Do not cancel before checking lender consent: bank-required key person cover that secures business debt cannot be cancelled without lender approval.
- Document the decision: the cancellation, assignment, or continuation decision should be documented and dated.
- Notify the insurer in writing: cancellation or change of ownership must be communicated to the insurer; do not just stop paying premiums.
- Tax position on assignment: assignment from business to individual may have CGT implications under ITAA 1997 s118-37 depending on the original ownership. Discuss with a registered tax agent.
Regulatory anchors
- Insurance Contracts Act 1984 (Cth): governs the policy contract terms.
- Life Insurance Act 1995 (Cth): defines the legal character of the cover.
- ITAA 1997 s118-37: governs the CGT position on assignment or claim.
This is general advice only. The right action when a key person leaves depends on business circumstances, contractual obligations, and the documented purpose of the cover. Discuss with a registered tax agent, the business's solicitor, and a licensed insurance adviser before taking action.