Key person insurance protects businesses against financial loss if a critical employee dies or becomes disabled. The business owns the policy, pays premiums (typically tax-deductible), and receives the payout to cover lost revenue, recruitment costs, and business stabilisation while replacing the key person.
Key person insurance is a business protection strategy where a company insures the life or health of essential employees whose absence would significantly impact business operations, revenue, or viability. It is also called keyperson or key man insurance.
The business owns the policy, pays the premiums, is the beneficiary, and receives the payout if the insured key person dies, becomes critically ill, or suffers total permanent disability.
Key people typically include:
Insurance proceeds compensate the business for financial losses, including:
The sum insured is typically calculated as one of:
Key person insurance premiums are generally tax-deductible as a business expense, subject to ATO criteria that the cover protects against revenue loss. Payouts are assessable income, though this may be offset against actual losses.
Key person insurance is separate from:
It is particularly important for small and medium businesses where one or two people drive most of the revenue or possess irreplaceable expertise.
Tech startup insures their lead developer for $1 million. When he dies unexpectedly, the payout covers six months of operation while recruiting and training a replacement, preventing business failure
Accounting firm insures their senior partner who manages $5 million in client relationships. When she becomes permanently disabled, the $800,000 payout helps transition clients and hire two replacement accountants
Manufacturing business insures their master craftsman with unique skills. When he suffers a serious illness, the $500,000 benefit covers the cost of training new staff and compensates for reduced production during the transition
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