Key Person Insurance
What happens to your business if you lose a key person?
Key person insurance provides a lump sum payment to the business if a key individual becomes critically ill, totally and permanently disabled, or dies. The payment can help offset lost revenue, fund recruitment or training, service debt, and support business continuity during a period of disruption.
Whether you are a sole trader or operate a business with key staff or specialists, key person insurance helps protect the business when the loss of one person could significantly impact its performance or survival.
DBI LTD, Financial Adviser (FSP 1007984), operating under AIA Thrive Limited (FSP 665291).
Key Facts
Lump Sum Payment to Business
Not monthly payments, one large payout
Can Cover Life, Trauma & TPD
Death, critical illness, or permanent disability. Cover definitions and eligibility vary by insurer and policy wording.
Protects Business Revenue
Covers lost income from key person's absence
Funds Recruitment & Transition
Hire replacements, train staff, maintain operations
What is Key Person Insurance?
Key person insurance is a type of business insurance where a life, trauma, or TPD policy is taken out by your business on a person who is critical to revenue generation or operations. If that person dies, is diagnosed with a serious illness, or becomes permanently disabled, your business receives a lump sum payment.
This lump sum helps your business:
- Replace lost revenue during the transition
- Recruit and train a replacement
- Cover increased costs (temporary staff, contractors)
- Maintain business stability and confidence
- Service debt or financial obligations
- Reassure clients, suppliers, and investors
Who counts as a 'key person'?
Anyone whose absence would significantly impact your business financially:
- •Business owners and directors
- •Top salespeople or client managers
- •Technical specialists or lead developers
- •Senior managers
- •Anyone who generates substantial revenue
- •Self-employed individuals (you are the key person)
💡Key person insurance is owned by the business, and the business receives the payout. This is different from personal life insurance, which pays you and your family.
Why You Need Key Person Insurance
Losing a key person can devastate a business. The financial impact goes beyond just replacing them, it affects revenue, client relationships, operational capacity, and business value.
What key person insurance covers:
Lost revenue during the transition period
Recruitment fees and headhunting costs
Training and onboarding new staff
Temporary contractors or specialist consultants
Increased costs for remaining staff (overtime, bonuses)
Debt servicing and loan repayments
Maintaining business value for sale or succession
Reassuring clients, suppliers, and stakeholders
Covering projects or contracts the key person was managing
Common scenarios where key person insurance is essential:
- •A salesperson generates 40% of company revenue
- •A technical specialist has unique skills
- •A director personally guarantees business loans
- •A surgeon runs a medical practice
- •A lead developer builds your core product
- •A key manager oversees major contracts
- •You're self-employed and ARE the business
- •Partners depend on each other's expertise
What Key Person Insurance Covers
Key person insurance typically includes three types of cover:
Life Cover
Payout if key person dies
Provides a lump sum to the business if the key person passes away.
What the payout can fund:
- •Lost revenue during transition
- •Recruitment of replacement
- •Training and onboarding
- •Temporary staff coverage
- •Debt repayment
- •Business restructuring
Life Cover: Unlimited maximum. Actual cover limits depend on insurer, underwriting, and business financials.
Most common claim: Unexpected death of owner or critical employee leaves business unable to operate at full capacity.
Trauma Cover
Payout if key person diagnosed with serious illness
Provides a lump sum if the key person is diagnosed with a covered critical illness like cancer, heart attack, or stroke.
Why this matters:
Even if the key person survives, they may be unable to work for months or years. The business still needs financial support during this time.
Common conditions covered:
- •Cancer (all stages)
- •Heart attack
- •Stroke
- •Major organ transplant
- •Parkinson's disease
- •Multiple sclerosis
Trauma Cover: Up to $2 million. Actual cover limits depend on insurer, underwriting, and business financials.
Key benefit: The key person is still alive, but the business receives funds to cover their absence and hire temporary support.
Learn more about trauma cover.
TPD Cover
Payout if key person can never work again
Provides a lump sum if the key person becomes totally and permanently disabled and unable to work in any suitable occupation.
Common causes of TPD claims:
- •Severe back or spinal injuries
- •Major brain injuries
- •Progressive neurological diseases
- •Severe mental health conditions
- •Loss of limbs or critical function
Why businesses need this:
If a key person can never return to work, the business needs funds to permanently replace them and restructure operations.
TPD Cover: Up to $5 million. Actual cover limits depend on insurer, underwriting, and business financials.
Key benefit: Covers long-term permanent disability scenarios that aren't covered by ACC or temporary illness.
Learn more about TPD cover.
How Key Person Insurance Works in New Zealand
Key person insurance is structured differently from personal insurance. The business owns the policy, pays the premiums, and receives the payout.
DBI advises and works with you every step of the way, from calculating and recommending adequate sums assured, to lodging claims on your behalf.
Step-by-step process:
Identify your key people
Determine who is critical to your business revenue or operations
Calculate cover amount
Based on their revenue contribution, replacement cost, and financial impact of their absence (typically 1-5 times annual revenue contribution), often with input from your accountant or adviser
Choose cover types
Life, Trauma, TPD, or all three
The business applies
Your company owns the policy and pays premiums
Underwriting
The key person completes health and lifestyle assessment
Policy activated
Once approved, cover is in place
Claim trigger
If the key person dies, is diagnosed with critical illness, or becomes permanently disabled
Business receives payout
Lump sum paid to the business (not the individual or their family)
Use funds as needed
Revenue replacement, recruitment, restructuring, debt servicing, or business continuity
Tax treatment:
- •Premium deductibility depends on the purpose of the cover and business structure
- •Claim proceeds may be taxable or non-taxable depending on how the policy is structured and used
- •Tax treatment should be confirmed with your accountant
Real Scenario: IT Consultancy Firm
A 4-person IT consultancy firm. The lead developer, aged 35, generates $400,000 annual revenue and manages all major client projects.
He's diagnosed with cancer triggering a Key Person Trauma claim and is unable to work for 12 months.
Impact on business:
- •$400k annual revenue at risk
- •Major client projects delayed
- •Remaining 3 staff can't cover his technical expertise
- •Business reputation at stake
- •Risk losing clients to competitors
With $500,000 Key Person Trauma Cover:
- ✓Trauma claim paid: $500,000 (subject to policy definition)
- ✓Hired 2 contract developers: $180,000
- ✓Maintained client projects and relationships
- ✓Covered salary costs during transition
- ✓Business survived and thrived
- ✓Lead developer eventually returned part-time
- ✓Premium cost: ~$94/month
Without Key Person Insurance:
- ✗Lost 3 major clients ($250k revenue)
- ✗Couldn't afford contract developers
- ✗Remaining staff overwhelmed and burnt out
- ✗1 staff member quit
- ✗Business downsized significantly
- ✗Recovery took 3+ years
Key Person Insurance vs Other Business Insurance
| Insurance Type | What It Covers | Payment Type | Purpose |
|---|---|---|---|
| Key Person Insurance | Revenue loss if key person dies/disabled | Lump sum to business | Protect revenue & fund replacement |
| Business Income Protection | Business overheads when you can't work | Monthly payments | Cover rent, wages, loans during recovery |
| Buy-Sell Insurance | Ownership buyout if shareholder dies/disabled | Lump sum for share purchase | Succession planning & ownership transfer |
| Personal Income Protection | Your personal salary | Monthly to you | Replace your income during illness |
💡Many businesses need multiple types: Key Person protects the business from losing critical people, Business Income Protection covers ongoing expenses, and personal insurance protects individual employees.
Who Needs Key Person Insurance?
Self-employed and sole traders
If you are the business, key person insurance ensures your business assets, commitments, and value are protected if something happens to you.
Small businesses (2-10 staff)
When one person generates most revenue or possesses critical skills, their absence can shut down operations or lose major clients.
Professional partnerships
Law firms, accounting practices, medical clinics, losing a key partner devastates client relationships and revenue.
Tech companies and start-ups
If you rely on a lead developer, CTO, or technical specialist whose skills are irreplaceable, you need protection.
Sales-driven businesses
When one salesperson generates 30-50% of revenue, losing them to illness or death creates immediate financial crisis.
Businesses with debt or investors
Lenders and investors want assurance that your business can survive losing a key person. Key person insurance provides that security.
How Much Key Person Insurance Do You Need?
Calculate key person insurance based on the financial impact of losing that person.
Common calculation methods:
Method 1: Revenue Contribution
Typical formula: 2-5 times annual revenue generated by the key person
Example: Salesperson generates $300k/year
- • Conservative: $300k × 2 = $600,000
- • Moderate: $300k × 3 = $900,000
- • Comprehensive: $300k × 5 = $1.5 million
Method 2: Replacement Cost
Calculate: Recruitment + training + temporary cover + lost productivity
Example: Senior developer
- • Recruitment fees: $30,000
- • Training new hire: $50,000
- • Contract developers (6 months): $120,000
- • Lost productivity/projects: $100,000
- Total: ~$300,000 cover needed
Method 3: Profit Contribution
For established businesses: 3-5 times annual profit attributed to key person
Example: Partner in accounting firm contributes $200k profit
Cover amount: $200k × 4 = $800,000
Self-Employed Calculation:
Annual revenue + business debts + transition costs
Example: Self-employed consultant
- • Annual revenue: $150,000
- • Business loan: $100,000
- • Transition/wind-down costs: $50,000
- Total: ~$300,000 cover needed
Not all key person risks are permanent
When structuring Key Person Insurance, it's important to understand how different cover types are designed to respond:
- •Death and Total & Permanent Disablement (TPD) usually result in the permanent loss of a key person to the business.
- •Trauma (Critical Illness) often results in a temporary loss, with many people able to return to work after treatment and recovery.
Because of this difference, businesses often structure:
- •Higher sums insured for Life and TPD, reflecting the long-term or permanent financial impact
- •Lower Trauma sums insured, designed to support cashflow, treatment, and business stability during recovery
The appropriate balance depends on the role, revenue dependency, business structure, and succession plans.
We'll help you calculate the right amount based on your specific business situation, revenue dependencies, and financial obligations.
Calculate Your Cover NeedsBusiness Loan Protection
If your business has loans, equipment finance, or debt, key person insurance can be structured specifically to cover these obligations if something happens to you.
How it works:
Key person insurance (Life + Trauma + TPD) can be set up with the benefit amount matching your business loan balance. If you die or become critically ill, the payout covers the debt, protecting the business and your family from default.
Common uses:
- Business bank loans
- Equipment finance or hire purchase
- Commercial property mortgages
- Director personal guarantees
- Start-up business loans
Who needs business loan protection:
- Any business owner with significant debt
- Directors who personally guarantee business loans
- Self-employed with equipment finance
- Businesses with commercial property mortgages
Business loan protection is usually structured using key person life, trauma, or TPD insurance, with the primary purpose being debt repayment rather than revenue replacement. We'll help you calculate the right amount based on your business debt levels.
Buy-Sell Agreements
If you have business partners or shareholders, buy-sell insurance ensures smooth ownership transitions if a partner dies, becomes critically ill, or is permanently disabled.
What is a buy-sell agreement?
A buy-sell agreement (also called a shareholder agreement or partnership agreement) is a legal contract between business owners that determines what happens to ownership shares if a partner dies, becomes critically ill, or is permanently disabled.
Without Buy-Sell Insurance:
- ✗Family members become unwanted business partners
- ✗Surviving partners lose control of decision-making
- ✗Family wants immediate cash, forcing business sale
- ✗Disputes over business valuation
- ✗Company may collapse
With Buy-Sell Insurance:
- ✓Agreement specifies buyout terms, valuation method, and process
- ✓Insurance provides immediate funds to purchase the deceased partner's share
- ✓Family receives fair cash payment
- ✓Surviving partners maintain 100% ownership
- ✓Business continues operating smoothly
💡Without insurance funding, surviving partners may be forced to sell the entire business or take on debt to buy out the deceased partner's family, often destroying years of business building.
How it works:
- 1.Partners enter into a legal buy-sell (business continuity) agreement
The agreement sets out valuation methods, trigger events, and ownership transfer rules.
- 2.Each partner is insured with Life and Total & Permanent Disablement (TPD) cover
These events typically result in the permanent loss of an owner to the business.
- 3.Policies are owned by the business or the individual partners
Ownership depends on whether a cross-purchase or entity-purchase structure is used.
- 4.A trigger event occurs (death or permanent disablement)
The insurance policy pays out in accordance with the agreement structure.
- 5.Surviving partners use the insurance proceeds to purchase the departing owner's share
This avoids forced sales, borrowing, or bringing in unwanted third parties.
- 6.The departing owner or their family receives cash, and ownership transfers smoothly
The business continues operating with clear control and preserved value.
Why Trauma cover is usually not included in buy-sell agreements
Buy-sell agreements are designed to respond to permanent exit events.
While Trauma (Critical Illness) cover can provide valuable support in other business scenarios, it is generally not suitable for buy-sell funding. Many trauma events allow for recovery and a return to work. Triggering a compulsory sale of shares in these situations can leave the affected owner worse off, losing ownership despite being capable of continuing in the business.
For this reason, most buy-sell agreements in New Zealand are funded using Life and TPD cover only.
Two Ways to Structure Buy-Sell Insurance
There are two main structures for buy-sell insurance in New Zealand. Each has different tax implications and practical considerations.
Cross-Purchase Agreement
Partners own policies on each other
✓ Advantages:
- ✓Surviving partners get tax-free payouts
- ✓No capital gains tax on insurance proceeds
- ✓Clean ownership transfer
⚠ Disadvantages:
- ✗More policies required
- ✗More complex to administer
- ✗Premiums generally not tax-deductible
Best for:
- •2-3 partners
- •Similar age/health profiles
- •Partnerships, not companies
Entity Purchase Agreement
Company owns policies on all partners
✓ Advantages:
- ✓Simpler structure (one policy per partner)
- ✓Easier administration
- ✓Premiums potentially tax-deductible
- ✓Better for 4+ shareholders
⚠ Disadvantages:
- ✗Potential tax complications on payout
- ✗May require shareholder resolution for payouts
- ✗Less tax-efficient than cross-purchase
Best for:
- •Companies (not partnerships)
- •4+ shareholders
- •Corporate structure
Work with your lawyer and accountant to determine the optimal structure for your business. Tax treatment varies significantly based on structure.
Get Expert AdviceFrequently Asked Questions
Common questions about Key Person Insurance and Buy-Sell Agreements in New Zealand.
Who owns a key person insurance policy?
Can self employed people take out key person insurance?
What happens to the payout if a key person dies or becomes disabled?
Does the key person's family receive any money?
What is the difference between key person insurance and personal life insurance?
Can a business insure more than one key person?
How long does a key person insurance claim take?
What happens if a key person leaves the business?
Is key person insurance the same as business income protection?
Can someone with health conditions still be insured as a key person?
Have more questions?
Let's talkProtect Your Business with Key Person and Buy-Sell Insurance
Get a free quote for key person insurance or buy-sell agreements. We'll help you identify critical employees, structure ownership transitions, and compare options from New Zealand's leading insurers.