What is key person insurance and how does it work?

Key person insurance is a business-owned policy that pays the business if a critical employee or owner dies, becomes disabled, or suffers a critical illness. The proceeds fund recruitment, replace lost revenue, or repay debt.

Key person cover is a use case, not a standalone product. The business buys Life, TPD, Trauma (Critical Illness), Income Protection, or Business Expenses cover on the life of a key employee or director. The business is the policy owner and the beneficiary.

How the structure works in practice

1. The business identifies a key person whose loss would cause material financial damage.
2. The business takes out cover on that person's life (with the person's consent for medical disclosure).
3. The business pays the premium from its own cash flow.
4. If the insured event occurs, proceeds are paid to the business.
5. The business applies the proceeds to its documented purpose: revenue replacement, capital protection, or buy-out funding.

How each panel insurer supports key person structuring

| Insurer | Mechanism | |---|---| | AIA | Business Safeguard Forward Underwriting (PDS Section 8.12), $10M max | | Acenda | Business Safeguard Option, $15M Life max (PDS pages 56 to 58) | | Zurich | Business cover events plus Zurich Business Expenses with key person replacement variant | | TAL | Business Insurance Option under Guaranteed Future Insurability Benefit | | OnePath | Future Insurability business events (PDS) | | ClearView | Future Increase Benefit business events | | NEOS | Future Increase Benefit business events ($200,000 per event cap) | | Encompass | Future Increase Benefit with explicit 'revenue protection (key person)' wording | | Futura | Future Increase Benefit business events ($200,000 per event cap) |

See AIA Priority Protection PDS (Version 32, 9 November 2025), Section 8.12, page 157; Acenda Insurance PDS (27 September 2025), pages 56 to 58; Zurich Wealth Protection PDS (1 November 2025), Business Expenses section; TAL Accelerated Protection PDS (12 December 2024), Guaranteed Future Insurability Benefit section.

What key person cover is not

Key person cover is not the same as personal life insurance, salary continuance, or workers' compensation. The owner is the business, not the individual. Proceeds are paid to the business, not the individual's family. If the key person leaves, the business decides whether to continue, transfer, or cancel cover.

Why purpose documentation matters

Australian tax treatment turns on the purpose of the cover, not the legal form. The Commissioner of Taxation's view in ATO Taxation Ruling TR 2009/2 sets out the framework: revenue purpose cover (replacing lost income) carries deductible premiums and assessable proceeds; capital purpose cover (recruitment funding, debt repayment, equity buyout) carries non-deductible premiums and proceeds that are generally exempt under ITAA 1997 s118-37(1)(a).

Regulatory anchors

Key person policy contracts sit under the Life Insurance Act 1995 (Cth) and the Insurance Contracts Act 1984 (Cth). Premium and proceeds tax treatment turns on ATO TR 2009/2, ATO TR 95/35, ATO TR 85/36, ITAA 1997 s8-1, and ITAA 1997 s118-37(1)(a).

This is general advice only. Tax treatment is complex and depends on business structure (sole trader, partnership, company, trust), cover purpose, and policy ownership. Discuss the structure with a registered tax agent and a licensed insurance adviser before applying.