If your business would struggle to survive losing one specific person, a founder, a top salesperson, a technical lead nobody else could replace overnight, that’s exactly the risk key person insurance is built for. It’s one of the more overlooked forms of business protection, and one of the most consequential to get right.
As a risk insurance broker, we help business owners work out whether key person insurance makes sense for their situation, and if it does, how much cover and what structure actually fits.
What Is Key Person Insurance?
Key person insurance, sometimes called keyman insurance, is a policy taken out by a business to cover the financial impact of losing someone whose contribution is critical to the business, through death, serious illness, or permanent disability. The policy is owned by the business, and the payout goes to the business, not to the individual’s family.
A key person isn’t necessarily the most senior person on the org chart. It’s whoever the business genuinely couldn’t function without in the short term, a founder, a specialist with irreplaceable technical knowledge, or a salesperson responsible for a large share of revenue.
What Does Key Person Insurance Cover?
Key person insurance is generally structured using life insurance, TPD, or trauma cover, or some combination of the three, depending on which risks the business wants to protect against. In practice, the payout is typically used to cover:
- The cost of recruiting and training a replacement
- Lost revenue or profit while the business adjusts
- Loan repayments or debts the key person had personally guaranteed
- Buying back business shares from a deceased or incapacitated owner’s estate
It’s worth distinguishing key person insurance from business expense insurance, which covers a different problem, ongoing fixed costs like rent and utilities if an owner can’t work, rather than the loss of a specific critical person’s contribution to the business.
Is Key Person Insurance Tax Deductible?
This is genuinely one of the more complicated parts of key person insurance, and it’s worth understanding before you assume either way.
Broadly, tax treatment depends on what the cover is for. If the policy is taken out for revenue purposes, to replace lost income or profit, or to fund the cost of recruiting and training a replacement, premiums are generally more likely to be deductible, and any payout may be treated as assessable income. If the policy is for capital purposes, such as repaying a business loan or buying back an owner’s shares, premiums are typically not deductible, and the payout may instead trigger capital gains tax considerations.
This distinction isn’t always straightforward in practice, and getting it wrong can be costly. This is general information only, not tax advice, always confirm the specific tax treatment with your accountant before deciding how to structure a policy.
How Much Does Key Person Insurance Cost?
Cost depends on the amount of cover, the key person’s age and health, and the type of cover used (life, TPD, trauma, or a combination). There’s no single average that applies across the board, a policy for a 30-something founder in good health looks very different to one for an older key person in a physically demanding role.
Rather than starting with a price, most businesses work backwards from the cover amount they actually need:
- The revenue or profit the key person is directly responsible for
- The realistic cost and time to recruit and train a replacement
- Any business debts the key person has personally guaranteed
- Whether the cover needs to fund a share buy-back if the key person is also an owner
In Australia, cover amounts commonly range from $500,000 up to $10 million, though the right figure depends entirely on what the business would actually need to survive the transition.
Insurance Advisers Top Tip:
Key person cover is almost always set once, at application, and then forgotten. If your business has grown since you took out the policy, the amount that made sense back then may be far short of what you’d actually need now. It’s worth reviewing key person cover every couple of years, the same way you’d review any other business insurance, not just when someone new joins.
How Key Person Insurance Is Owned and Structured
Key person insurance is usually owned by the business itself, not the individual, which is different to how most personal cover works. If you’re unfamiliar with how business-owned life insurance policies differ from personally-owned ones, it’s worth reading our guide on the different ways life insurance can be bought and owned before deciding how to structure key person cover for your business.
Does Every Business Need Key Person Insurance?
Not necessarily. Key person insurance tends to matter most for businesses that are genuinely reliant on one or two individuals, startups leaning heavily on a founder, businesses with a single dominant salesperson, or companies where a key person has personally guaranteed significant debt. A larger business with a deep leadership bench and no single point of failure may have less need for it, or need it for a narrower group of people.
A broker can help assess whether your business genuinely has key person risk worth insuring, rather than assuming either way.
Key Person Insurance FAQs
What’s the difference between key person insurance and keyman insurance?
Nothing, they’re the same product. “Keyman insurance” is the older, more traditional term; “key person insurance” is the more current, gender-neutral phrasing now used across most of the industry.
Who counts as a key person in a business?
Anyone whose loss would cause serious financial or operational disruption, a founder, a specialist with unique knowledge, or a salesperson responsible for a large share of revenue. It’s about impact, not job title.
Is key person insurance the same as buy-sell insurance?
No, though they’re often used together. Buy-sell insurance funds the purchase of a departing owner’s share of the business. Key person insurance covers the broader financial impact of losing someone critical, which may or may not include an ownership stake.
How much key person insurance should a small business take out?
There’s no fixed formula, but a reasonable starting point is the cost of replacing the key person (recruitment, training, lost revenue during the transition) plus any business debts they’ve personally guaranteed. A broker can help model this more precisely for your specific situation.
Get Your Business’s Key Person Risk Assessed
If you’re not sure whether your business has genuine key person risk, or how much cover would actually make sense, our brokers can walk you through it. Get in touch for a free, no-obligation conversation.
