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Find the Right Keyman Insurance to Protect Your Business from Loss

When a key person, such as a business partner, key employee or owner is unable to work or passes away, it affects business profits, revenue and expenses, and might even influence the business’s ability to attract new customers. Keyman insurance protects the company against the possible costs associated with the loss of a person, who is essential to the business.

Russell Cain

Fact Checked

Updated: 19 May 2024

Ask yourself, what would happen if a key individual in the company were to suffer an accident or illness and can no longer work? What impact would their death or disablement have on the business?

Reduce the financial burden that comes with losing a key person in your business with a keyman insurance policy.

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What is key man insurance?

Key person insurance, or keyman insurance, protects the business against the loss of an individual who makes a significant contribution to the company. This type of insurance policy usually pays a lump sum benefit used to cover the unexpected costs associated with the loss of a key person, like hiring and training a replacement person, covering any debts or loans and filling gaps in revenue due to lost business opportunities.

The events that could trigger the loss of an individual need to be insured, for example, an accident, illness, injury, disablement or death.

Keyman insurance can take the form of life cover, TPD or trauma insurance. The lump sum benefit can be used to reduce the financial burden a business may suffer from the loss of a key person. Keyman Insurance is designed to protect the business, not the individual.

Who is covered under this insurance?

A key person in Australia is defined as an individual whose continued association with a business provides that business with a significant and direct economic gain.

Economic gain means more than just profits. It can also include capital injections, cost efficiency, goodwill, access to credit and contacts with suppliers and customers.

A key man is that person or those people without whom the company will not be able to continue business as usual. For example:

Who needs this cover?

If your business profitability hinges on the continued input of one or more people, principals and/or highly skilled employees, you probably need keyman insurance to cover:

How does key man insurance work?

Generally, key people can be insured for death, trauma and total and permanent disablement. The business purchases the keyman insurance policy and pays the premiums, making it the policy owner and will usually list itself as the beneficiary. Should the insured person die or be unable to work for an extended period, the business will receive a lump sum payout. The lump sum benefit can then be used to help the company continue as usual.

Because the business owns the key person insurance policies and pays the premiums, the key individual has no interest or right to the policy. In exchange for premiums paid, your key man life insurance policy covers the most important people in your business.

A key person Insurance policy can cover the essential individual for a combination of any of the following:

 

What does key man insurance cover?

Key person protection, generally covers the business against the loss of revenue or for capital purposes, like paying off debts. The sudden loss of a key individual via death or disability has a negative financial impact on sales and profits as well as the business’s capital value, goodwill and credit rating. Depending on the company’s circumstances, key person insurance can be used for recovering Revenue or Capital.

There are three main types of keyman insurance policies available in Australia: Revenue or Capital Protection, and Buy Sell insurance.

A case study

William runs a successful chemical manufacturing company and employs a certified industrial chemist, Karl, who is critical to the business’ core activities.

Karl’s loss would have a significant impact on the business, resulting in temporary replacement costs, recruitment costs and perhaps additional training for a replacement. Thus, William would like to ensure the company is protected should Karl’s be unable to work due to illness, disability or death.

The manufacturing company purchases a life, TPD and trauma policy on Karl’s life with the intention of using the policy proceeds to temporarily replace Karl while they attract a replacement with his specialised skills.

In this example, key person insurance would be for revenue protection, which means the insurance premiums would be deductible, and the policy proceeds would be taxed as ordinary income by manufacturing company.

How much cover should I have?

The amount of keyman life insurance coverage you need depends on the size of your business and the purpose of the keyman insurance policy, i.e. for revenue or capital purposes. Generally, the smaller the enterprise, the more likely it is to be dependent on one or a few key people.

Businesses that are especially vulnerable to key person risk include those whose owners are ‘the face of the company’ and those whose principals are indispensable, either because of their unique skills/expertise or extraordinary and often undocumented, input.

However, generally, the amount of cover required might be calculated based on the amount of profit a key person brings to the company and the loss that would occur without them.

To help you determine how much coverage you need, consider how much time and money the business would need to recover if:

  • A key income producing Executive Director dies or becomes disabled;
  • A business loan guarantor dies;
  • A key business employee suddenly suffers a traumatic event (such as cancer) and is unable to work, having to take 6 months off work;
  • A joint business partner dies, and the company shares are passed onto a former business partner’s estate. The former business partner now owns this part of the business and might become a decision maker.

Each business or company is different, and so each keyman insurance policy should be tailored to meet the company’s unique needs. If your business already has credit insurance which covers outstanding loans and debt amounts, you might not need as much keyman insurance.

What does this type of insurance cost?

The cost of a keyman policy varies from insurer to insurer and will depend on several factors, including; the level of cover you want, he key person’s age, health and specific occupation, and the size and complexity of the business.

The average cost of keyman insurance in Australia

Insurer
Policy
Average Monthly Premium
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Priority Protection Vitality
$42.19
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Accelerated Protection – Health Sense
$46.11
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Life Solutions
$52.33
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Insurance with On Track
$52.92
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Wealth Protection
$55.68
Demo Image
$41.15
$57.34

Above costs of keyman insurance were calculated on $1 million life cover for a non-smoking, male key person aged 40, living in NSW (April 2018).

 

How to compare keyman insurance policies

Get keyman insurance quotes online in under 60 seconds. Use our comparison service for a side-by-side review of pricing, benefits and features from some of the largest life insurance companies in Australia.

  1. Choose the policy type suited to your unique requirements.
  2. Fill in the quote form with your ideal cover amount.
  3. Compare and review keyman insurance policies online.
  4. Apply, and a specialist will give you a call to help you complete the process.

Frequently Asked Questions and Answers

The taxation treatment of keyman insurance depends on whether the proceeds are for a capital or revenue protection purpose. The purpose of insurance will impact the deductibility of premiums and the receipt of proceeds.

Premiums for revenue protection are generally deductible, and the policy proceeds are taxed as income. A deduction may be available where any policy proceeds are used to pay business operating expenses.

Premiums for capital protection are usually not deductible, and the policy proceeds are not taxed as they are not included as income. However, capital gains tax (CGT) may apply.

The main difference between key man insurance and life insurance is the ownership structure. Key person insurance protects the company against the financial loss of a key employee, and the business will usually be the owner of the policy. Life insurance usually protects the insured person’s family against the loss of financial security and the owner of the policy is generally the person paying the premiums.

Generally, business owners, directors, senior executive and employees with essential knowledge and experience that are invaluable to the running of the business are seen as key people.

Keyman insurance is designed to protect the business should it lose someone who makes a significant contribution towards the company’s profitability, stability and growth potential.

Businesses, large and small across Australia should consider taking out a keyman policy on any essential employee in their business.

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Specialist

Russell is the founder and CEO of Life Insurance Direct and has been quoted in The Sydney Morning Herald, The Age, Independent Financial Adviser, Risk Adviser, Adviservoice, and Insurancenews. Russell has over 15 years’ experience in the Australian life insurance & financial services sector and is instrumental in driving the latest innovations in our insuretech platform.

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