Key Takeaway

Key person insurance is a type of life insurance that pays your business a lump sum if a critical owner, director, or employee dies or becomes totally and permanently disabled. The payout helps cover lost revenue, recruitment costs, loan repayments, and the financial shock of losing someone whose skills, relationships, or knowledge drive the business. It is especially relevant for small and medium businesses where one or two people generate most of the income or hold essential client relationships.

What Key Person Insurance Covers

Key person insurance is a business expense, not a personal policy. The business owns the policy, pays the premiums, and receives the benefit if the insured person dies or suffers total and permanent disability (TPD). According to ASIC MoneySmart, the cover amount should reflect the financial impact of losing that person, including lost profit, the cost of finding and training a replacement, and any debt the business must service while revenue drops (MoneySmart, 2024).

The policy typically covers death and TPD. Some insurers offer trauma or income protection add-ons, though these are less common in key person policies. The business nominates the key person, undergoes underwriting (medical questions, sometimes a health check), and the insurer sets the premium based on the person’s age, health, occupation, and the sum insured.

Who Needs Key Person Insurance

Businesses where one or two people are essential to revenue or operations benefit most. Common scenarios include a medical practice where the principal doctor generates 80 per cent of billings, a trades business where the owner holds the licences and client relationships, a consultancy where a director brings in all the major contracts, or a tech start-up where the founder is the only person who understands the core product.

As covered in Introduction to Business, small enterprises often rely on a handful of individuals whose departure would immediately threaten cash flow and operational continuity (OpenStax, 2018). Key person insurance gives the business breathing room to stabilise, recruit, and rebuild without immediate financial collapse.

If your business could survive the loss of any single person without serious revenue impact, or if the person is easily replaced within a short timeframe, key person insurance may not be necessary. Larger businesses with diversified teams and documented processes typically face lower key person risk.

How It Works in Australia

Key person insurance is regulated by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). The Product Disclosure Statement (PDS) sets out what is covered, exclusions (suicide within the first 13 months, pre-existing conditions not disclosed, certain high-risk activities), waiting periods, and how to claim (ASIC, 2024).

Premiums are generally tax-deductible as a business expense, and the payout is assessable income to the business. This differs from personal life insurance held inside superannuation, where premiums are paid from super and the benefit goes to beneficiaries tax-free. Always confirm the tax treatment with a registered tax agent before purchasing, as rules vary by business structure and policy terms.

The business must demonstrate insurable interest (the person’s loss would cause genuine financial harm). Insurers assess this during underwriting and may cap the sum insured based on the business’s revenue, profit, and the person’s role.

Read also: Terminal Illness Benefit in Australian Life Cover: What It Already Includes

What to Consider Before You Buy

Calculate the financial impact realistically. Consider lost revenue over one to two years, recruitment and training costs, loan repayments the business must meet, and any key contracts that might lapse. Over-insuring wastes premium; under-insuring leaves a gap when you claim.

Read the PDS and the Target Market Determination (TMD) carefully. Check exclusions, waiting periods, the definition of total and permanent disability (some policies require you to be unable to work in any occupation, others in your own occupation), and whether the policy is renewable and at what terms.

Compare quotes from at least three insurers. Premiums vary based on the insurer’s underwriting, the person’s health and age, and the sum insured. A licensed insurance adviser can help you assess your needs and compare policies, though you are not required to use one (Insurance Council of Australia, 2024).

Review the cover annually. As the business grows, the key person’s role may change, new key people may emerge, or the original key person may become less critical. Adjust the sum insured and the list of insured people to match your current risk.

Next Steps

If you think your business relies on one or two people whose loss would cause serious financial harm, request a quote from a licensed insurer or speak with a licensed insurance adviser. Provide realistic revenue and profit figures, describe the key person’s role, and ask for a breakdown of what is covered and excluded. Read the PDS and TMD before you sign, and confirm the tax treatment with a registered tax agent.

General Advice Warning: This article provides general information only and does not take into account your business objectives, financial situation, or needs. Before acting on this information, consider whether it is appropriate for your circumstances, read the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD), and consider obtaining personal advice from a licensed insurance adviser or financial adviser. Cover terms, exclusions, and availability vary by insurer and by the individual’s health and occupation. Premium deductibility and benefit tax treatment depend on your business structure and should be confirmed with a registered tax agent. This is not legal, tax, or financial advice. Consult a licensed professional for your specific situation.