Is key person insurance mandatory for businesses in Australia?

No, key person insurance is not legally mandatory for Australian businesses - it is an optional form of business protection insurance that companies can choose to implement based on their risk management strategy and circumstances. However, while not mandated by law, key person insurance often becomes practically mandatory in certain business situations. Approximately 70% of businesses report that lenders required key person insurance as a condition for business loan approval, particularly for small to medium enterprises. Banks and financial institutions increasingly view key person insurance as essential risk mitigation before extending credit, especially when loans are secured against personal assets or when the business is heavily dependent on specific individuals. Some business partnership agreements or shareholder agreements contractually require key person insurance as part of buy-sell arrangements. Franchise agreements may require franchisees to maintain key person insurance on themselves. While around 50% of Australian small businesses with fewer than 20 employees currently have key person insurance in place, many business advisers consider it a critical component of sound business planning, particularly for businesses where one or two individuals drive the majority of revenue or hold critical relationships. Even without external requirements, businesses that depend heavily on specific individuals face significant financial risk without this protection, making it a prudent business decision regardless of mandatory requirements.