Protect the key people in your business
Key Person insurance protects the business against the loss of a principal or other person who is integral to the business. The loss of key people can have significant adverse financial impacts on the business.
For example, if you are an executive level manager who is responsible for maintaining large revenue streams relative to the business, and/or are overseeing a majority of key personnel, you may want to consider your options.
Purpose of key person business insurance
Key Person insurance helps to ensure that a business survives following the loss of a key person in the event of death, disablement or trauma. There are two different purposes – ‘revenue purpose’ or ‘capital purpose’. It is necessary to distinguish between them for taxation purposes.
What is key person insurance – capital purposes?
The sudden loss of a key person means the business may need to:
The business may take out an insurance policy on each key person to offset the anticipated financial loss. In this instance, the insurance required is for ‘capital purposes’ as it adds to the value of the business.
The business owns the policy, pays the premiums and receives the proceeds if something happens to the key person. The proceeds are not assessable as income and the premiums are non-deductible. However, proceeds received by the business for Total and Permanent Disability (TPD) or Trauma insurance are subject to Capital Gains Tax (CGT). Life insurance proceeds are exempt.
What is key person insurance – revenue purposes?
The sudden loss of a key person means that a suitable replacement may need to be found and the business may face unexpected costs for recruitment. The business may also want compensation for reduced revenue, sales and profit to help meet other expenses.
The business may take out an insurance policy on each key person to offset the anticipated financial loss. In this instance, the insurance required is for ‘revenue purposes’.
The business owns the policy, pays the premiums and receives the proceeds if something happens to the key person. If the business made a declaration at the time of paying the premium that the purpose was of a ‘revenue’ nature, then generally the premiums would be tax deductible and the proceeds would be assessable income of the business.
If you would like to discuss your options, we encourage you to simply request a call and we will reach out as soon as possible.
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The information contained on this webpage does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions. Whilst all care has been taken in the preparation of this information (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Centrepoint Alliance Limited or any member of the Centrepoint Alliance Group of companies and also Dumont Wealth Pty Ltd, Dumont Holdings or any member or related companies accept responsibility for any loss suffered by any person arising from reliance on this information. The information documented on this website page is valid at the date of upload (3 October 2024) and should be reverified by the reader at the time of viewing.
