Key Person Insurance
Protect your business if a critical team member becomes unable to work. From $150/month.
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What is Key Person Insurance?
Key person insurance (also called key man insurance) is a business insurance policy that provides financial compensation if a critical employee dies, becomes disabled, or suffers a serious illness. The business owns the policy, pays the premiums, and receives the payout.
Unlike personal life insurance that protects an individual's family, key person insurance protects the business itself from the financial impact of losing someone essential to operations, revenue generation, or business relationships.
Quick Example:
A Wellington tech company has a lead developer who built their entire platform and maintains client relationships. If he suddenly dies, the company loses $500,000 in annual revenue while scrambling to hire and train a replacement over 12 months. A $500,000 key person policy would cover this loss, keeping the business afloat during the transition.
Why Your Business Needs Key Person Insurance
Without Key Person Insurance:
- Immediate loss of revenue from key relationships
- Expensive recruitment and training costs
- Business loan defaults if owner dies
- Loss of investor and supplier confidence
- Potential business closure within months
With Key Person Insurance:
- Immediate cash to cover lost revenue
- Funds to hire and train replacement staff
- Ability to continue loan repayments
- Maintains stakeholder confidence
- Business continuity and survival
Who Should Be Covered as a Key Person?
A key person is anyone whose death or disability would significantly impact your business revenue, operations, or survival. This typically includes:
👤 Business Owners
Founders and directors who drive the business strategy, hold key relationships, or are essential to operations.
💼 Top Salespeople
Sales directors or account managers who generate significant revenue or maintain major client relationships.
🔧 Technical Experts
Lead developers, engineers, or specialists with unique skills or knowledge that would be expensive and time-consuming to replace.
👨⚕️ Professional Practitioners
Doctors, dentists, lawyers, accountants whose personal service generates the majority of business income.
🎨 Creative Directors
Senior creatives in marketing, design, or media agencies whose reputation attracts clients.
⚙️ Operations Managers
People who keep the business running day-to-day and have deep operational knowledge.
Ask yourself: If this person couldn't work tomorrow, would it seriously damage our revenue, operations, or ability to secure contracts? If yes, they're a key person.
Real-World Example
Case Study: Christchurch Marketing Agency
The Situation:
A 12-person marketing agency has a creative director, Sarah (age 45), who personally manages their three largest clients worth $750,000 annual revenue - representing 60% of total business income. The clients specifically chose the agency because of Sarah's reputation and experience.
The Crisis:
Sarah is diagnosed with breast cancer and requires 9 months of treatment and recovery. She cannot work during this period. Two of the three major clients immediately indicate they may move to competitors.
Without Key Person Insurance:
The agency faces:
- $450,000 lost revenue (60% of Sarah's client billings)
- $120,000 cost to hire two senior account managers urgently
- $85,000 in ongoing overhead costs for 9 months with reduced revenue
- Potential business closure or sale at fire-sale prices
Total Financial Impact: $655,000
With Key Person Insurance:
The agency had a $500,000 key person policy on Sarah costing $4,200/year. The insurance payout provided:
- $250,000 to cover lost revenue during Sarah's absence
- $120,000 to hire two experienced account managers
- $130,000 to invest in client retention initiatives and operations
The agency retained both major clients, maintained staff employment, and when Sarah returned to work 10 months later, the business was stable and growing.
Result: A $4,200/year insurance premium saved the business from a $655,000 loss and potential closure. Sarah's personal health insurance protected her family, while key person insurance protected the business and her colleagues' jobs.
How Key Person Insurance Works
Identify Key People
Determine which employees are critical to your business revenue and operations. Most businesses have 1-3 key people.
Calculate Coverage Amount
Calculate the financial impact of losing this person. Consider: annual revenue they generate, cost to replace them, loan obligations, and operating expenses during transition. Most policies range from $250,000 to $2,000,000.
Purchase Policy
The business owns the policy, pays premiums, and is the beneficiary. The key person completes a health questionnaire and may need a medical examination for larger policies.
Receive Payout if Needed
If the key person dies, becomes totally and permanently disabled, or (with optional trauma cover) suffers a critical illness, the business receives a lump sum payout to use as needed.
Use Funds to Recover
Use the payout for recruitment, training, covering lost revenue, maintaining operations, paying down debt, or restructuring the business as needed.
Coverage Options
Death Cover
Pays out if the key person dies. This is the standard core coverage included in all key person policies.
✓ Always included
Total & Permanent Disability (TPD)
Pays out if the key person becomes permanently unable to work in their occupation due to injury or illness.
✓ Highly recommended
Trauma/Critical Illness
Optional add-on that pays out if the key person suffers a serious illness like cancer, heart attack, or stroke.
○ Optional
What Affects the Cost?
Typical Premium Ranges (NZ)
$500,000 cover, 35-year-old non-smoker:
$150-250/month
$1,000,000 cover, 45-year-old non-smoker:
$400-650/month
Premium Factors:
Age
Younger key people have significantly lower premiums. A 30-year-old pays roughly 50% less than a 50-year-old for the same cover.
Health and Lifestyle
Smokers pay 2-3x more. Pre-existing conditions, obesity, and high-risk activities increase premiums or may be excluded.
Coverage Amount
Higher cover amounts cost more, but the rate per $100,000 decreases. $1M cover isn't double the price of $500K.
Occupation
Office-based roles are cheapest. Trade and construction workers face higher premiums due to injury risk.
Coverage Type
Life-only cover is cheapest. Adding TPD increases cost by 30-60%. Trauma cover adds another 40-70% to premiums.
Tax and Legal Considerations (NZ)
✓ Tax Deductible Premiums
Key person insurance premiums are generally tax deductible as a business expense, provided the policy is structured correctly and genuinely protects business revenue.
The policy must be owned by the business, protect against lost revenue, and not be convertible to personal ownership.
Policy Payout Tax Treatment
If premiums were tax-deductible, the insurance payout is generally taxable income to the business. However, this is often offset because the business uses the funds to cover expenses (recruitment, lost revenue) which are themselves tax-deductible.
⚠️ Important: Get Professional Advice
Tax treatment depends on policy structure, who owns it, and how proceeds are used. Always consult your accountant when setting up key person insurance to ensure it's structured correctly for your situation.
Policy Ownership Structure
The business should own the policy, pay premiums from business funds, and be listed as the beneficiary. The insured person (key person) must consent and complete medical underwriting.
Common Questions
How much cover do I need?
Calculate the financial impact of losing the person:
- Revenue impact: Annual revenue they generate × 1-2 years
- Replacement costs: Recruitment fees ($20k-50k) + training time (3-12 months salary)
- Debt obligations: Any business loans that need immediate attention
- Operating expenses: 6-12 months of costs during transition
Most policies range from $250,000 to $2,000,000. A good rule of thumb is 3-5x the key person's annual salary, or their annual revenue contribution.
What happens if the key person leaves the company?
If they resign or are terminated, you can cancel the policy without penalty, or you can transfer coverage to their replacement once they're established as a key person. Most policies have no early termination fees.
Can the key person have their own life insurance as well?
Yes, absolutely. Key person insurance protects the business, while personal life insurance protects the individual's family. They serve completely different purposes and don't affect each other. Most key people have both.
Do I need key person insurance if I have shareholder protection?
They serve different purposes. Shareholder protection funds the purchase of a deceased shareholder's shares by remaining shareholders. Key person insurance provides cash to cover lost revenue and operational costs. Many businesses need both, especially if the shareholder is also a key revenue generator.
Does key person insurance cover retirement?
No. Key person insurance only pays out on death, permanent disability, or (if included) critical illness. It doesn't cover planned retirement. For retirement transitions, you need advance succession planning, not insurance.
How quickly can I get cover?
For straightforward cases with good health, you can get cover within 2-4 weeks. This includes application, medical questions, and policy issue. Larger policies ($1M+) or complex health situations may require medical exams and take 4-8 weeks.
How to Get Key Person Insurance
Identify Your Key People
List employees whose absence would significantly impact revenue or operations. Consider owners, top salespeople, technical experts, and essential managers.
Calculate Financial Impact
Estimate lost revenue, replacement costs, and operational expenses if each key person was suddenly unavailable. This determines your coverage amount.
Get Quotes from Multiple Insurers
Compare policies from multiple insurers. Premiums can vary by 30-50% for identical coverage. Consider both cost and insurer financial strength.
Complete Application & Medical Questions
The key person completes health questionnaires. Be honest - non-disclosure can void the policy. Medical exams may be required for policies over $1M.
Structure for Tax Efficiency
Work with your accountant to ensure the policy is structured correctly. The business should own the policy and be listed as beneficiary for premiums to be tax-deductible.
Review Coverage Annually
As your business grows and roles change, review coverage amounts annually. Add new key people and adjust coverage as needed.
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