What is key person insurance and how does it work?

Key person insurance is a business protection policy taken out by a company on the life of a key employee whose loss would significantly impact the business financially. Unlike personal life insurance, the business owns the policy, pays the premiums, and receives the benefit if a claim is made. The policy typically covers death, total and permanent disability (TPD), and trauma or critical illness. When a key person dies or becomes unable to work, the insurance payout goes directly to the business to help cover lost revenue, recruitment and training costs for a replacement, debt repayment, or other financial impacts. The funds provide crucial breathing space for the business to stabilise operations, maintain profitability, and continue trading during what would otherwise be a financially devastating period. This type of insurance is particularly important for small to medium businesses that rely heavily on specific individuals.