Business Owner? If You Die, Your Company Dies. Why You Need 'Key Person Insurance'

👔 The "Hit by a Bus" Test

You have insured your factory, your ute, and your inventory. But what is your business's single most valuable asset? Usually, it is a human being. Maybe it's you, your top revenue-generator, or your lead engineer. If that person died tomorrow, would your turnover drop by 50%? Would the bank immediately call in your loans? If the answer is yes, your business is financially exposed.

Business Owner?

Key Person Insurance is essentially a life insurance policy taken out by a business on a critical employee or director.

If that individual passes away or suffers a critical illness, the insurance payout goes directly to the company, not the family. This cash injection provides the liquidity needed to keep the lights on during a crisis.

Revenue vs. Capital (The Two Tax Treatments)

Before you sign a contract, you must define the purpose of the cover. In Australia (under ATO Ruling IT 2434), this designation determines the tax treatment.

Purpose	What It Covers	Tax Implication (General Rule)
Revenue Purpose	Replaces lost trading revenue/sales while finding a replacement.	Premiums: Tax Deductible Payout: Taxable as Income
Capital Purpose	Pays off business debts (Loans, Personal Guarantees).	Premiums: NOT Deductible Payout: Generally Non-Assessable*

Warning: Incorrectly structuring a Capital Purpose policy can lead to Capital Gains Tax (CGT) issues. Documentation (Minutes of Meeting) at the time of application is critical.

The "Buy-Sell" Connection

Key Person Insurance protects the company's cash flow. It is often paired with a separate Buy-Sell Agreement (Shareholder Protection).

If your business partner passes away, their share of the business typically transfers to their estate (spouse/children). Suddenly, you are in business with your partner's grieving spouse who may know nothing about the industry.

🤝 The Solution:

A funded Buy-Sell Agreement ensures there is cash available to buy out the estate immediately. The family receives fair market value in cash; you retain full control of the business. Everyone is protected.

Chief Editor’s Verdict

You wouldn't run a factory without fire insurance. Why operate a business without insuring the rainmakers who generate the profit?

If your business relies on a specific individual to survive, insure them. It is the only way to ensure your company survives their funeral.

⚖️ Legal Disclaimer:
The information provided in this article is general in nature and does not constitute financial, legal, or tax advice. Taxation of insurance premiums and benefits in Australia (per ATO rulings such as IT 2434) is complex and depends on the specific purpose of the cover and the structure of the business. Buy-Sell agreements require legally drafted contracts. Always consult with a qualified financial adviser and your accountant before implementing Key Person Insurance.