How does key person insurance work for business partnerships?

Key person insurance for business partnerships serves dual purposes and requires careful structuring to protect both the business and the partners. In partnerships, each partner is typically considered a key person whose loss would significantly impact business operations and profitability. The partnership should consider taking out key person insurance on each partner for two distinct purposes. First, revenue-purpose coverage protects the partnership's ongoing operations by providing funds to replace the lost partner's contribution to revenue, cover recruitment costs for replacement expertise, and maintain business stability during transition. The partnership owns this policy, pays the premiums (which are tax-deductible), and receives benefits as assessable income. Second, capital-purpose coverage, often structured through buy-sell agreements, funds the purchase of the deceased or disabled partner's share from their estate or family. This prevents forced business sales or unwanted family members becoming partners. The premiums aren't tax-deductible but proceeds generally aren't assessable income. Ownership structures vary: the partnership might own all policies, partners might cross-own policies on each other, or policies might be held in trust. According to Australian tax law, death benefits may be CGT-exempt if the original beneficial owner receives proceeds. Partnership agreements should clearly document insurance requirements, what happens when partners exit, how buyout values are calculated, and how insurance proceeds are distributed. Professional advice ensures the insurance structure aligns with the partnership agreement and achieves optimal tax outcomes while protecting all partners' interests.