Featuring Brad Berman, Senior Risk Adviser, Orbital Life
Most business owners have heard of key person insurance. Fewer understand just how critical it is – it is not enough to just to have a policy in place, but critical to have the right policy, structured with precision.
According to Brad Berman, Senior Risk Adviser at Orbital Life in Sydney, the real risk isn’t just the sudden loss of a key contributor – it’s how badly that risk is often miscalculated.
“It’s not enough to know what key person insurance is,” says Berman. “You have to understand how to calculate it properly, and that comes down to industry, recruitment timeframes, role complexity, tax implications and more.”
Two types of cover, one critical decision
Key person insurance typically falls into two categories: revenue protection and capital protection.
- Revenue protection covers the short-term impact of losing a key contributor who drives sales or operational efficiency. Think of it as a buffer – to pay creditors, reassure stakeholders, and give the business breathing space.
- Capital protection is often linked to a loan or financial guarantee. For example, if a director has personally guaranteed a $1 million business loan, capital protection would ensure that loan is repaid if they passed away or were incapacitated.
“Board members at larger companies might understand the concept,” Berman says. “But even then, the nuances of how much cover is appropriate, can often be overlooked.”
Calculating cover: It’s a science, not a guess
So, what are the biggest mistakes people make when calculating key person insurance?
“They underestimate what it actually takes to replace a business owner or senior contributor,” Berman says. “You might need two or three people to replace the workload and institutional knowledge of one founder. And the market rate for those replacements is often way above the founder’s current drawdown.”
It’s not just about salary replacement, either. Specialist industries often have limited talent pools – think water purification startups or niche engineering roles – replacement timelines could stretch to 12-18 months. That downtime needs to be factored in.
Then there’s tax. Revenue-style key person payouts are treated as business income—meaning 25% will go straight to the ATO.
“You need to gross up the cover by at least 25%, or your business won’t receive the full amount it expects,” Berman warns.
Don’t “set and forget”
Key person insurance is not a one-and-done decision. As businesses evolve, so do their needs – and their key people.
“We had a client paying $30,000 a year on a policy for a former CEO who’d sold down 80% of their shareholding four years earlier,” says Berman. “No one had reviewed the policy. It took us to ask: why are we still paying this?”
Sometimes, the key person’s role becomes less critical over time. Processes become documented, training is standardised, and a broader team is built.
“When you remove the knowledge bottleneck, the business becomes more resilient – and the insurance requirements change.”
The complexity of claims
When a key person dies or becomes seriously ill, the business – not the individual or their family – is the policy beneficiary. That means collecting information like a death certificate, dealing with family members during a vulnerable time, and carefully managing privacy and communication.
“If the key person’s own insurance isn’t in place, the family might be struggling financially – yet we’re calling them on behalf of the business,” Berman explains. “It can be awkward and emotional. That’s why we often end up managing their personal cover too – it’s just the right thing to do.”
The danger of incomplete disclosures
There’s another risk many businesses overlook: the application relies on the key person being completely honest in disclosing their medical history. If they omit something – whether intentionally or by accident – the policy may be voided.
And the company might not find out until it’s too late.
“The insurer can investigate at claim time,” Berman explains. “They’ll go through Medicare records, GP visits, private health. If they find a material non-disclosure, they can deny the claim and refund premiums paid and close the case.”
Final thoughts: The real “key”
At its heart, key person insurance isn’t about ticking boxes—it’s about deeply understanding your people, your business and your future plans.
Done right, it protects the business when it needs it most. Done poorly – or worse, not at all – it could leave a company exposed during its most vulnerable moment.
“This isn’t just a policy,” says Berman. “It’s a business continuity strategy.”
Is your business properly protected?
Getting key person insurance right means understanding the unique dynamics of your business and your people. If you’d like to review your existing cover or explore how key person insurance could strengthen your business continuity plan, reach out to the team at Orbital Life.