Understanding key person insurance cover

If you’re a business owner, it’s important to think about what would happen if you or one of your key employees or business partners suddenly became critically ill or worse.

Like any insurance cover you hold in your business, key person insurance (KPI) protects your business assets – only in this case what you are protecting is your human assets.

Who is a key person?

KPI policies generally define a key person as someone directly associated with the business who provides significant economic gain and whose loss would cause it financial difficulties or call its ongoing success into question. This is typically the managing director, sales director, IT specialist or financial controller.

Other employees who have strong relationships with major clients, or specialist technical knowledge on which the business relies to continue operating, may also be considered a key person.

Generally sole traders and one-person incorporated businesses can’t insure themselves as a key person. If you have employees, however, you may be able to buy cover for them.

Annual premiums for KPI are based on the amount of cover applied for, together with the insured’s age, health and occupation.

Premiums may be deductible

The ATO recognises the value of KPI to many businesses and in some situations the annual premiums your business pays are considered a legitimate tax deduction.

Unfortunately, the rules around deductibility are complicated and depend on whether the policy is held for revenue or capital purposes. Generally, if you use a KPI policy for revenue purposes such as replacing lost revenue, or for operating expenses such as rent, advertising and utilities, the premiums are deductible.

If the policy is used for capital purposes such as debt repayment, compensation for loss of goodwill, or as a lump sum payment to the deceased’s estate, premiums are not tax deductible.

This is a complex area and it’s vital to document carefully the purpose of a KPI policy to ensure the deductibility of annual premiums and that any future payout is not subject to capital gains tax (CGT). The purpose of the policy should be regularly reviewed, and the documentation updated to avoid future tax problems.

To find out more get in touch with us today.

General Disclaimer

The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination. Asparq cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.