- Income Protection Insurance
- Choosing The Best Income Protection Insurance
- Is Income Protection Insurance Tax Deductible?
- Income Protection Through Superannuation
- What Is Income Protection Insurance?
- Income Protection vs Mortgage Protection
- Income Protection – A Basic Breakdown
- MLC Income Protection
- TAL Income Protection
- CommInsure Income Protecion Insurance
- Life Insurance Products
- What is Life Insurance?
- Why Do I Need Life Insurance?
- How To Purchase Life Insurance
- Key Person Insurance
- Life Insurance vs Income Protection
- Life Insurance Glossary
- Frequently Asked Questions
- Is Life Insurance Tax Deductible?
- How Much Life Insurance Do You Need?
- AMP Life Insurance
- Best Life Insurance
- Family Life Insurance
- Income Protection & GST
- Life Insurance And Superannuation
- Life Insurance For Seniors
- MLC Life Insurance
- When Is Life Insurance Paid Out?
Key Person Insurance: What is it, and is it suitable for you?
As a business owner, you want to protect your important assets and quite often, this means your employees. Key person insurance (also called key man insurance) is a type of corporate-owned life insurance which can insure an employer against the death or incapacitation of a key employee, usually an executive or partner. It is used by both large companies and small partnerships alike.
This provides financial protection against lost revenue profits and the capital value of your business, should a key person suffer a major illness, injury, or death.
How do you determine a “key person”?
How does a person become classed as “key”? That’s completely up to you as a business owner; you may choose to insure an executive, principal shareholder, a senior scientist, or a particularly effective salesperson.
Basically, an employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company.
The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer may suffer in the event of the loss of a key person.
If you’re considering taking up this cover, look at your business and decide which individuals are irreplaceable in the short-term. Would the business would be in trouble if you lost a certain employee (or yourself, as the owner or founder)? Don’t just consider profits; you should also look at economic loss due to capital contributions, relationships with suppliers and customers, and cost efficiency.
What does key person insurance cover?
If an indispensable member of your business dies or becomes permanently impaired, key person insurance is generally paid as a lump sum benefit, up to policy limits, used to reduce the financial strain a business may experience following this loss. It’s designed as protection for the business, rather than the person.
It covers the individual for any or a combination of:
- Life insurance: If the key person passes away
- Total and Permanent Disability insurance: If the key person is permanently disabled, e.g. due to loss of limbs or sight and is unlikely to ever work again
- Trauma insurance: If the key person is diagnosed with a critical illness, such as cancer or a stroke
Is key person insurance compulsory?
Taking out adequate insurance may minimise the risk to your business should something go wrong. Taking out key person insurance is not mandatory, but there are some other forms of insurance for Australian businesses that you may want to learn more about1:
- Workers compensation: Workers compensation protects you and your employees if the case of a work-related illness or injury arises2
- Public liability insurance: Compulsory for certain types of companies, public liability insurance covers you for death or injury of a third party3
- Third party personal injury insurance: This is mandatory if your business owns a vehicle and may be included as part of your vehicle registration fee
What is excluded from key person insurance?
Before taking out insurance from any retailer, ensure you read the Product Disclosure Statement (PDS) in full. Some items may be excluded from the policy. Common exclusions can include:
- Intentional dishonesty
- Suicide that occurs within the contestability period
A contestability period applies to most life insurance products. It is a contractual clause that says that any claims made generally in the first two years following the taking out of insurance will be investigated. This is a measure to prevent fraud and ensure the original application was placed using accurate, honest information.
How much cover do you need?
The appropriate level of cover to take out is usually determined by the size of the business and the person that is to be insured.
Smaller companies with partners can decide to take out key person insurance to protect each partner. For example, if a partner of a firm passes away, usually the other partner or partners need to purchase the shares in the business from the family of the deceased.
Considering purchasing Key Person Insurance? Compare policies with iSelect
Remember that the cheapest policy around doesn’t always equal the most suitable policy for you. Each business is unique, and comparing policies may help you find one which suits you. As mentioned earlier, you should always read the PDS for a better idea of product inclusions and exclusions.
iSelect does not compare all life insurers or life insurance products in the market. iSelect therefore does not compare products offered by life insurers who are not our partners. iSelect maintains an internal list of approved life insurance products that our advisers compare from all of iSelect’s partners. We call this our ‘Approved Product List’. iSelect have commercial arrangements with each of the partners. Click here to view our range of partners.
iSelect General Pty Limited ABN 90 131 798 126, AFS Licence Number: 334115. 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 we give you, having regard to your personal situation, before acting on our advice or purchasing any product. You should consider iSelect’s Financial Services Guide which provides information about our services and your rights as a client of iSelect. We receive commission for each product sold.