In 2025, Australian businesses face mounting challenges—economic shifts, talent shortages, and growing regulatory demands. Amidst these pressures, many overlook a vital safeguard: key person insurance. This specialised cover can mean the difference between survival and collapse if a crucial team member is suddenly lost to illness, disability, or death.
What is Key Person Insurance and Who Needs It?
Key person insurance is a business-owned policy that pays out a benefit if an essential employee, owner, or director is unable to work due to serious illness, injury, or death. Unlike standard life or TPD insurance, the payout goes directly to the business—not the individual or their family. The goal? To cushion the financial blow and help the company continue operating, repay debts, or fund the search for a replacement.
- Startups and SMEs: Often heavily reliant on founders or a few key specialists.
- Family businesses: Where knowledge and relationships are concentrated among a handful of people.
- Professional firms: Accounting, legal, or medical practices dependent on rainmakers or technical experts.
For example, consider a tech startup in Sydney where the CTO holds all the intellectual property and client relationships. If that CTO is incapacitated, the company may face major revenue loss, costly recruitment, or even the risk of closure. Key person insurance can fund interim management, client retention strategies, or debt repayments, buying vital time for recovery.
Key Policy Features and 2025 Updates
In 2025, several changes and trends are shaping the key person insurance landscape in Australia:
- Expanded definitions of ‘key person’: Insurers now recognise a broader range of roles—think data security officers, lead engineers, or even top salespeople, reflecting modern business risks.
- Policy flexibility: New offerings allow for tailored benefit periods, stepped premiums, and integration with buy/sell agreements.
- Digital underwriting: Faster, data-driven application processes are reducing turnaround times, with some insurers offering same-week approvals for sums insured up to $5 million.
- Tax treatment clarified: The ATO’s 2024-25 guidance reaffirms that premiums may be deductible if the policy is for revenue protection (e.g. covering lost profits), but not for capital protection (e.g. repaying a loan or funding share buyouts). Payouts may be assessable income—review your policy’s structure with an accountant.
Recent cases highlight the importance of proper structuring. In 2024, a Melbourne manufacturing firm suffered the sudden loss of their operations manager. Because their policy was set up for capital protection, the payout was not tax-deductible, but it enabled the business to clear a major loan and avoid insolvency.
Making the Most of Key Person Insurance
Getting value from key person insurance in 2025 involves more than just signing a policy. Here’s how to approach it strategically:
- Identify true key people: Go beyond titles. Who holds unique knowledge, client trust, or technical skills that can’t be easily replaced?
- Calculate the right sum insured: Factor in recruitment costs, training, lost revenue, debt obligations, and the estimated time to recover.
- Review your business structure: Align insurance with shareholder agreements, succession plans, and loan covenants. This avoids disputes or misdirected payouts.
- Update regularly: Roles and business risks evolve. Reassess your cover annually—especially after major hires, product launches, or funding rounds.
Many brokers now offer ‘key person audits’ to help businesses map their risks and determine optimal cover. In 2025, some insurers are even bundling key person policies with business interruption insurance or group health plans for a holistic approach.
Conclusion: Don’t Leave Your Business Exposed
As Australian businesses adapt to a rapidly shifting landscape in 2025, protecting your most valuable asset—your people—has never been more important. Key person insurance isn’t just a financial product; it’s a strategic shield that can keep your doors open and your team employed if the unthinkable happens. Assess your exposure, consult with your advisers, and make key person cover a core part of your business risk management this year.
