How does key person insurance integrate with business succession planning?

Key person insurance is an essential component of comprehensive business succession planning in Australia, providing crucial financial resources to facilitate smooth transitions. While key person insurance addresses the immediate financial impact of losing a critical person, it works alongside other succession tools like buy-sell agreements and shareholder protection insurance. In a well-structured succession plan, key person insurance serves multiple purposes: it funds the business continuation during the transition period while searching for and training a replacement; it provides capital to buy out a deceased or disabled owner's shares from their family; it covers debt obligations that might accelerate upon a key person's death; and it maintains business valuation and creditor confidence during vulnerable periods. According to Australian best practices, a succession plan should include both a legally binding succession agreement and a funding mechanism, with insurance often being the most efficient funding source compared to selling assets or borrowing capital. The policy structure must be carefully designed - death benefits for capital purposes may be CGT-exempt if the policy ownership is properly structured, while revenue-purpose proceeds face different tax treatment. Integration requires clear governance protocols defining decision-making authority, claims procedures, and fund distribution mechanisms when key person events occur.