What is the key person insurance claims process?

The key person insurance claim runs in three phases: lodgement (insurer notified, claim form returned), assessment (medical and financial evidence gathered), and payment (lump sum or monthly benefit to the business as policy owner). Standard turnaround on the panel is 4 to 12 weeks for clean Life claims, and 3 to 6 months for TPD claims requiring permanence evidence.

This is general advice only. The claim outcome depends on the policy wording at issue date and the medical evidence presented. Engage a licensed adviser to manage complex claims.

Phase 1: lodgement

When a key person dies, becomes totally and permanently disabled, or is diagnosed with a critical illness, the business as policy owner contacts the insurer's claims team. Standard panel claims timeframes are governed by the Life Insurance Code of Practice 2019 (LICOP):

• Insurer must acknowledge lodgement within 10 business days
• Insurer must decide straightforward claims within 6 months and complex claims within 12 months

The claims form requests:

• Policy number and ownership confirmation
• Triggering event (date, type, supporting documentation)
• Bank account of the policy-owning entity
• Accountant's letter confirming the original purpose of the cover (capital or revenue)

Phase 2: assessment

Evidence varies by cover type.

Life cover (death):

• Certified death certificate
• Coroner's report if applicable
• Medical history if death occurred within the contestability period

TPD (Total and Permanent Disability):

• Treating doctor's report
• Insurer-appointed specialist assessment (often required for own-occupation TPD)
• Functional capacity evaluation
• Confirmation of permanence (definition varies by insurer; SIS Reg 4.07D restricts inside-super TPD to any-occupation since 1 July 2014)

Critical Illness (Trauma):

• Specialist diagnosis confirming the condition meets the PDS definition
• Survival period evidence (typically 14 days on panel products; AIA Priority Protection PDS 9 November 2025, Zurich Wealth Protection PDS 1 November 2025, and Acenda Insurance PDS 27 September 2025 all use the 14-day standard)

Business Expense Cover (monthly benefit):

• Monthly business expense statements
• Invoices and lease agreements for the claimed expenses
• Employment contracts for non-revenue-generating staff (per Zurich's allowable business expenses definition of the Zurich Wealth Protection PDS, salaries of revenue-generating employees and the life insured's own remuneration are excluded)

Phase 3: payment

Once approved, the insurer pays the policy owner. For Key Person cover this is the business (company, partnership, or trust), not the deceased's estate. The business then applies the proceeds per the documented purpose.

Typical timeframes by claim type

| Claim type | Typical turnaround | |------------|---------------------| | Life cover, uncontested | 4 to 12 weeks | | Critical Illness / Trauma | 6 to 12 weeks | | TPD, requiring permanence | 3 to 6 months or longer | | Business Expense Cover, monthly | First payment within 30 to 60 days; ongoing monthly |

Delays usually trace to:

• Incomplete medical evidence requiring specialist follow-up
• Non-disclosure concerns under Insurance Contracts Act 1984 s20B (duty to take reasonable care not to make a misrepresentation)
• Conditions not meeting the precise PDS definition (Trauma is most prone to this)
• Coroner involvement in unusual death circumstances

Tax classification at claim time

The ATO can re-characterise proceeds based on actual use, even if the original purpose was documented. For capital-purpose claims:

• Pay proceeds into a separate "Key Person Reserve" account rather than the operating account
• Apply the proceeds to the documented capital purpose (buyout, debt repayment, recruitment cost)
• Retain accountant working papers showing the application

For revenue-purpose claims, treat the proceeds as assessable income in the year of receipt under ITAA 1997 s8-1 and ATO TR 2009/2. Cross-references: ATO TR 2003/9 (life insurance policies), TR 95/35 (IP premium deductibility), TR 85/36 (insurance proceed receipts).

External dispute resolution

If the claim is declined or partially paid, the policy owner can lodge a complaint with AFCA (Australian Financial Complaints Authority) under Corporations Act 2001 Part 7.10A. AFCA determinations bind the insurer if the complainant accepts; the complainant retains court rights either way.