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Key Person Insurance
Key Person Insurance
Written by
Madeline Pettet
Edited by
Laura Crowden
Reviewed by
Adrian BennettEasily compare life insurance quotes
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What is key person insurance?
Long story short
Typically, key person insurance is owned by the business with any benefits paid out to the business
The funds may help the business to repay debt, cover short-term expenses, or replace lost earnings.
A key person is someone critical to a business’ operations for any number of reasons
They might be a director, or have important client connections or specialist knowledge.
Key person insurance is for when a key person can’t work for the business anymore
They might have become critically ill, been permanently disabled, or, sadly, passed away.
What expenses the key person insurance was taken out to cover may affect if the premiums are tax deductible
If the insurance is for revenue purposes, the premiums may be tax deductible; they typically aren’t if the policy is for capital purposes.
What is key person insurance?
Key person insurance – also sometimes called key man insurance (but that term overlooks our she and they colleagues) – is a bit of a life insurance–business insurance hybrid. If someone central to your business is no longer able to work, key person insurance could help keep things business as usual as much as possible.
FYI: this cover isn’t for when a key person takes a holiday or opts for early retirement. Think more along the lines of what other life insurance policies cover, like total and permanent disability, critical illness or trauma, and, sadly, death.
Unlike other types of life insurance, any benefits from key person insurance go to the business, rather than the subject of the policy or their family. This money can then help balance out lost business earnings.
Who could be considered a key person?
A key person is anyone who your business would struggle to succeed without. They usually have specific skills, knowledge, and/or relationships that are key to the business’ success. Directors, standout salespeople, tech experts, and even yourself (if it’s your business) could all be key people.
Helpful tip
Key person insurance and income protection both fall under the life insurance umbrella. They’re both also safeguards for if a particular person is unable to work. However, unlike key person insurance, income protection is for personal financial protection, like keeping on top of bills and providing for your family.
Adrian Bennett
General Manager for General Insurance
What type of businesses does key person insurance suit?
Every business is unique, however, businesses who rely heavily on certain employees each day may find key person insurance more appealing.
For instance, newer businesses may only have a few employees, including in critical roles. If one of these employees were to suddenly be out of action, the business may have to seriously halt growth or even shut up shop. So, key person insurance might offer a safety net.
Well-established businesses could also see sense in this kind of insurance. Managing directors, top salespeople, even the one person at the place who knows all the software inside-out could leave a huge revenue hole if they were no longer able to clock in.
As any businessperson knows, sometimes you’ve got to spend money to make money. If a key person has been so kind as to loan money to the business but then can no longer work, this insurance might mitigate risk by helping pay that loan back.
What type of events can it cover?
While it is always a good idea to double check the policy documents for these kinds of specifics, key person insurance tends to cover three broad events. These are:
- if the key person passes away
- if the key person is diagnosed with a critical illness or injury, like a stroke or heart attack
- if the key person becomes permanently disabled and is unable to return to work.
Are there different reasons to take out cover?
Revenue or capital concerns tend to be the main drivers for picking up key person insurance.
Revenue
If a business is without one of its key people, you could expect to see a slump in revenue. Additional costs, like recruiting and training a replacement, could also eat away at what revenue is brought in.
Capital
Sometimes, key people can add value to a business – literally. Losing them could cause goodwill to slide too. It may also make repaying loans difficult, whether to creditors or to the key person themselves.
Of course, these aren’t the only reasons a business may take out key person insurance. They may have unique risks for which this kind of insurance offers some peace of mind.
How much does key person insurance cost?
Just like how each key person and business is different, so is the cost of insuring them.
However, you might find it helpful to know what kinds of factors can affect a key person insurance premium. These are similar to what you might need to provide for underwriting personal life insurance, including:
- age
- gender
- occupational duties
- health.
Can key person insurance be tax deductible?
It all comes down to what you’re using the insurance for. If the insurance is for revenue purposes, those premiums are usually tax deductible. However, if it’s used for capital purposes, you’re out of luck.1For more information, see Australian Taxation Office – Business deductions
How much coverage might I need?
When it comes to key person insurance, coverage can be closely connected to the key person and the impact losing them would mean. In a nutshell, you might want to consider the lost revenue or capital the business could face, and what amount of coverage would help the business weather this.
Where can I find and compare key person insurance?
A business is only as good as its people. That’s why iSelect and our trusted partner, Lifebroker, are here to help your business and employees. You can use the online comparison tool to compare key person insurance policies from some of Australia’s leading insurers in a matter of minutes.
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iSelect’s partnered with Lifebroker (AFS Licence number: 400209) to help you compare a range of Life Insurance policies. iSelect earns a commission from Lifebroker for each customer referred through the website or contact centre. Lifebroker do not compare all life insurers or policies in the market.
iSelect Life Pty Ltd – ABN 89 124 304 347, AFS Licence Number 331128. Any advice provided by iSelect is of a general nature and does not take into account your objectives, financial situation or needs. You need to consider the appropriateness of any information or general advice iSelect gives you, having regard to your personal situation, before acting on iSelect’s advice or purchasing any policies. You should consider iSelect’s Financial Services Guide which provides information about iSelect services and your rights as a client of iSelect.’