Key Person Insurance: Protecting Your Business from the Unexpected
Author: Becky Lau – Principal Adviser of Earnest InvestSmart
📅 Published: Mar 12, 2025 | ⏳ Reading Time: 3 Minutes
Why Your Business Needs Key Person Insurance
As a business owner, you insure your physical assets—buildings, equipment, and inventory—but have you considered insuring one of your most valuable assets: your key people?
Key person insurance is a crucial yet often overlooked component of business continuity planning. Without it, the sudden loss of a key employee, partner, or executive could jeopardize your company’s financial stability and long-term success.
What is Key Person Insurance?
Key person insurance is a life or disability insurance policy that a business takes out on its most critical personnel. The company owns the policy, pays the premiums, and is the beneficiary. If a key person dies or becomes permanently disabled, the insurance payout provides the financial support necessary to sustain operations, cover losses, or fund a transition plan.
Who is Considered a Key Person?
A key person is someone whose expertise, leadership, or business relationships are vital to your company's revenue, operations, or growth. This could be:
A founder or owner
A top executive or director
A lead salesperson
A technical expert or innovator
Why is Key Person Insurance Important?
Losing a key person can have a devastating impact on your business. Key person insurance helps mitigate financial risks by covering:
✅ Loss of Revenue – If a key employee generates significant income, their absence can result in reduced sales and profits.
✅ Recruitment and Training Costs – Finding and training a replacement for a key role can be costly and time-consuming.
✅ Debt Repayment – If the key person was a guarantor on business loans, insurance proceeds can cover outstanding debts.
✅ Business Stability – The payout can help stabilize operations, reassuring employees, clients, and investors.
✅ Buy-Sell Agreements – In partnerships, insurance can fund a buyout of the deceased partner’s share, preventing business disruption.
Types of Key Person Insurance
Key person insurance policies typically serve one or both of the following purposes:
1. Revenue Protection
Covers financial losses caused by the key person's absence.
Premiums are tax-deductible.
Payouts are considered taxable income.
2. Capital Protection
Covers outstanding debts, goodwill loss, or business buyouts.
Premiums are not tax-deductible.
Payouts are generally tax-free but may be subject to capital gains tax (CGT) in some cases.
How Much Coverage Do You Need?
Determining the right amount of coverage depends on:
📌 The revenue the key person generates annually.
📌 The estimated recruitment and training costs for a replacement.
📌 Any outstanding loans or financial obligations tied to the key person.
📌 The potential impact on goodwill and business valuation.
Policy Ownership and Tax Considerations
Ownership of the policy should align with your business structure:
🔹 Sole Traders: The business owner holds the policy.
🔹 Partnerships: Partners hold policies on each other or the partnership owns them.
🔹 Companies & Trusts: The entity owns the policy to ensure proceeds benefit the business.
🔹 Superannuation Funds: Generally not recommended due to restrictions on using benefits for business purposes.
Key Takeaways
✅ If your business relies on specific individuals for revenue, operations, or financial security, key person insurance is essential.
✅ Carefully assess how the loss of a key person would impact your company’s finances and plan accordingly.
✅ Work with financial advisors, accountants, and legal professionals to structure the right coverage and ownership to maximize tax efficiency and business protection.
Final Thoughts
No one likes to think about worst-case scenarios, but proactive planning ensures your business can weather unexpected challenges. Key person insurance is an investment in your company's future, providing financial security and business continuity when it’s needed most.
If you're unsure where to start, consult a financial adviser to determine the best key person insurance strategy for your business today.
📚 Further Reading & Related Articles
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