Key Person Insurance –Protection for Business Viability

Key Person Insurance

Key person insurance protects a business by providing a lump sum if a ‘trigger’ event such as death, disability or major illness (for example cancer) occurs.

What is Key Person Insurance?

This policy is owned by the business and the proceeds from this insurance policy are injected into the business
should the key person covered suffer one of the ‘trigger’ events (i.e. death, disability or major illness). The insurance provides a lump sum that can be used to:

  • Offset a reduction in revenue while the business restructures or a replacement is found.
  • Cover the costs associated with finding and training a suitable replacement.
  • Reduce or repay debts.
  • Protect a personal or business asset used as loan security.

How it works

Key people are the most valuable asset a business can have.

Their departure (especially if unexpected due to
health) could cause havoc not only to that person’s family, but also to the business and to the lives of all who remain involved in the business.

Key person contingency strategies are designed to provide the business with money to offset the financial loss resulting from the disability, major illness or death of a key person.

Who is a Key Person?

A key person is someone who:

  • Gets things done.
  • Builds goodwill. Goodwill enhances the value of the business and is vital to continued success.
  • Improves the credit standing of the business. Skill and efficiency often enhances the credit extended to a business by suppliers and bankers alike.
  • Contributes to revenue either directly via sales and account management or indirectly via technical skills.
  • They might be a manager, director, company secretary, chief financial officer, accountant, supervisor, foreman or technical specialist who has skills which would be difficult to replace if they
    involuntarily departed.

A key person does not need to be a Director or Shareholder but could be a key employee.

Key Person Insurance

When it comes to the success of your business, your key personnel play an invaluable role.

Key person insurance is designed to protect your business against the unexpected loss of a crucial team member due to events like death or disability.

What is the business impact?

  • Revenue may fall, expenses increase and profits be impacted upon.
  • It will take time and money to find a replacement and perhaps months for the new person to become fully effective. In the meantime, momentum flags and profitability may fall.
  • Others in the business may have their attention diverted, causing a decrease in productivity and downward pressure on cash flow.
  • Liquidity and credit can be affected. Creditors can be quick to press for payment, debtors slow to pay and lenders reluctant to advance to a business after the loss of a key person.
  • The proprietors may feel bound to continue to pay the key person given that they are either a proprietor or at least a valued employee.

To protect the business in the short term, key personnel should be insured to provide sufficient funding to cover
the loss in revenue. This will provide the company with some breathing space to restructure for the future,
without the financial strain resulting from a reduction in turnover.

In addition, or alternatively, the business may wish to reduce the levels of debt or protect goodwill by providing sufficient funds to cover such capital costs/losses.

Insurance policy ownership

The business usually owns and pays the premiums for business continuation insurance.

If the cover is obtained for revenue purposes, the premium is tax deductible. Claim proceeds are paid to the business and are generally assessable as income to the business. The expenses it is used to cover may be tax

Where cover is obtained for capital purposes, the premiums are not tax deductible. Death benefits paid to the business are not assessable but proceeds paid for critical illness or total and permanent disablement are
assessable to the business as a capital gain. The insured amount can be grossed up to cover this expected tax

Designed to manage the risk to your business if a business owner is forced to exit due to illness, injury or death, Buy/sell insurance pays a lump sum that ensures the remaining owners can acquire the departing owner’s equity and continue to run the business (if that’s what you’ve stated in your agreement). 

The risks that can be covered by buy/sell insurance are death of a partner (via life insurance), major illness such as heart attack, stroke, cancer (trauma insurance) and total and permanent disability (TPD insurance). 

Think of buy/sell like a 'business will'

Buy /Sell agreement help to minimise risks like:
  • Remaining owner(s) having to sell the business or try to borrow money to pay out departing owner/estate.
  • Assets being frozen due to legal issues regarding the departing owner, their family or estate.
  • The departing owner’s family trying to become an active business partner in their absence, against the wishes of the continuing partners.
  • The departing owner’s family or estate trying to sell their share to an unsatisfactory third party.


Learn more about how buy-sell insurance works in real life and read about some example case studies in our latest blog. 

Contact Orbital Life. We’re happy to help.