Key Person Insurance

Key person insurance (also called keyperson or key man insurance) is a business protection strategy where a company insures the life or health of essential employees whose absence would significantly impact business operations, revenue, or viability. The business owns the policy, pays the premiums, is the beneficiary, and receives the payout if the insured key person dies, becomes critically ill, or suffers total permanent disability. Key people typically include business owners, senior executives, top salespeople, specialists with unique skills, or employees with crucial client relationships. The insurance proceeds compensate the business for financial losses including lost revenue during the transition period, costs of recruiting and training a replacement, maintaining client confidence, covering business debts or obligations, and stabilising operations during disruption. In Australian taxation, key person insurance premiums are generally tax-deductible as a business expense (subject to ATO criteria that the cover protects against revenue loss), while payouts are assessable income, though this may be offset against actual losses. The sum insured is typically calculated as a multiple of the key person's salary (5-10 times), contribution to revenue, or the estimated cost to replace them and recover from their loss. Key person insurance is separate from buy-sell insurance (which funds ownership transfer) and business expense insurance (which covers ongoing overhead costs). It's particularly important for small and medium businesses where one or two people drive most of the revenue or possess irreplaceable expertise.