For when the business IS the person

Key person cover, for when the business IS the person.

A policy owned by the business that pays a lump sum to the business if a key person dies or becomes permanently disabled. Used to fund replacement hiring, cover lost profit during transition, and keep lenders comfortable.

TL;DR

NZ small businesses are disproportionately dependent on one or two people. The founder who is also the head of sales. The partner who holds the client relationships. The licensed builder whose name is on the consents. If that person disappears, the business often doesn't survive the next 18 months. Key person insurance is a policy owned by the business that pays a lump sum to the business on death or permanent disability of the named key person, funding the cost of recovery.

Who owns it: the business (usually the company, sometimes a trust or LP).
Who's insured: a named individual whose loss would materially damage the business.
What triggers payout: death, terminal illness, total & permanent disability, sometimes trauma.
Tax treatment: depends on structure (revenue vs capital protection); we structure with your accountant.

What it is

A policy paid to the business, not the family.

Personal life insurance pays a benefit to the family or estate of the person insured. Key person insurance does something structurally different: the business itself owns the policy, pays the premiums, and receives the benefit. The person insured is named in the policy but the cover is not for their estate; it's for the entity that depends on them.

The reason this matters is that personal life cover and key person cover are answering different questions. Personal cover answers "what does my family lose if I die or am disabled." Key person cover answers "what does the business lose if this individual dies or is disabled." For a sole director-shareholder of a $2 million revenue business, those are very different numbers. The household might lose $200,000 of after-tax income a year; the business might lose 60 percent of its top-line revenue and become unsaleable inside 12 months.

The policy itself is structurally identical to personal cover, just with ownership and beneficiary aimed at the company. Most NZ insurers offer key person life cover, key person trauma cover, key person income protection (technically business expense cover) and combinations. The same insurer panel applies: Asteron, AIA, Partners Life, Fidelity Life, Cigna for life and trauma; specialist business products for ongoing expense cover.

Who needs it

The four NZ business shapes that almost always need it.

One: founder-led businesses doing $1m+ in revenue. If you started the business, you probably still hold most of the customer relationships, the supplier relationships, the technical knowledge or all three. If revenue is meaningful and the business has staff, debt or commercial obligations, your absence creates an immediate liquidity problem the business has to solve while also grieving. Key person cover converts that into a funded transition.

Two: partner-led professional firms. Law, accounting, architecture, financial advice, dental, veterinary. A two-to-five-partner firm typically has clients distributed unevenly across the partners. Losing one partner can lose 20 to 40 percent of the revenue inside 12 months as those clients leave for other firms. Key person cover funds the time and cash to retain the book.

Three: trade businesses built around a licensed operator. Builder, electrician, plumber whose licence is the one the business operates under. If the licensed operator dies or is disabled, the business may be unable to take on new work in their absence. Cover funds the cost of bringing in another licensed operator or winding down cleanly.

Four: businesses with concentrated rainmaker income. Businesses where one salesperson or one relationship-holder drives a disproportionate share of revenue. Common in B2B services, in industrial sales, in commercial real estate. The mathematical test is whether one departure would drop revenue by more than 25 percent in the year following.

The pattern across all four is the same. A specific person carries a specific share of the business's earning capacity. Their absence creates a quantifiable financial hole. Key person cover fills the hole.

Sizing the cover

Two methods, then take the larger.

There are two standard methods for sizing key person cover. Both are defensible, both are used in NZ underwriting practice. We model both and use the larger result as the sum insured.

Method 1: multiples of profit. Take the key person's contribution to net profit (their share of net income before tax, attributable to their work) and multiply by the number of years the business needs to recover. The multiplier is usually 2 to 5 years depending on the business shape. For a partner-led professional firm, 3 years is a common multiplier because it takes that long to rebuild a client book. For a trade business with a licensed operator, 2 years is often enough.

Worked example. A founder of a small business contributing $250,000 of net profit a year, with a recovery period of 3 years, would justify $750,000 of key person cover under this method. The premium for $750,000 of life cover at age 45 on a desk occupation is meaningful but not catastrophic, perhaps in the order of a few thousand dollars a year (the actual quote varies by insurer and underwriting).

Method 2: replacement cost. Calculate the full cost of replacing the key person: recruitment fees, sign-on bonus, salary, training time, the productivity gap between a new hire and the established person, and the cost of any external consultants or interim staff needed during the transition. Add the legal, accounting and restructuring costs the business will incur.

Worked example. Replacing a partner in a 5-partner firm might cost: $40,000 recruitment, $200,000 salary in year 1, $150,000 in lost productivity through the ramp-up year, $30,000 in interim consulting, $15,000 in legal and accounting. That's around $435,000 of direct replacement cost in year 1, plus a multiplier for the time required to rebuild relationships.

We do both calculations, take the larger of the two, then add a buffer for the unknown costs that always emerge in actual transitions. The end number is usually somewhere between two and five times the key person's annual salary.

Tax treatment

Revenue vs capital, and why the structure matters.

Tax treatment of key person insurance in NZ depends on whether the policy is structured to replace revenue or to replace capital. IRD has a long-standing position on this and the structure decision is made at application, not at claim.

Revenue protection structure. The policy is structured to replace lost revenue or profit caused by the key person's absence. Under this structure, premiums are generally deductible as a business expense and the benefit, when paid, is taxable as business income. This is the most common structure for cover funding replacement costs, transition expenses and lost profit during recovery.

Capital protection structure. The policy is structured to replace a capital loss, typically the loss of a director's capital contribution or the cost of buying out a shareholder's family. Under this structure, premiums are not deductible and the benefit is not taxable. This is the standard structure for shareholder buy-sell cover.

Picking the wrong structure has consequences that emerge at claim time, when it's too late to change. We work this through with your accountant before binding the cover, document the rationale in writing, and structure the policy ownership, premium payment and beneficiary arrangements to match. For most NZ small businesses with a mix of revenue and capital exposure, the right answer is often two separate policies with two separate structures.

Important: tax treatment depends on the specific facts of your business and policy structure, and on IRD's then-current view. The general framework above is current understanding of NZ tax practice; the specific advice on your situation must come from a qualified tax adviser. We coordinate with your accountant as part of the cover-design process.

Three illustrative scenarios

How the cover plays out.

The three scenarios below are illustrative patterns drawn from common NZ small business shapes, not from specific Wealth Health client files. Real anonymised case examples to be added with Craig before publish.

Founder-led services business #01 · TBC

"Founder, $2m revenue, 12 staff. Stroke at 52."

Illustrative pattern. Owner-operator of a B2B services business doing around $2m revenue, 12 staff, $400k owner profit. Stroke leaves the founder unable to return to work. Key person cover of $1.2m (around 3 years of owner profit) pays to the business inside 90 days of the TPD claim being accepted. The board hires an interim CEO, restructures the senior team, and keeps the business intact for sale 18 months later at a defensible valuation. Without the cover the business likely closes within 12 months.

Illustrative pattern · TBC against a real anonymised case

Partner-led professional firm #02 · TBC

"3-partner firm, sudden death of one partner."

Illustrative pattern. A 3-partner professional firm with the deceased partner holding around 35 percent of the client book. Key person cover of $700,000 (replacement-cost basis) pays to the firm. Cover funds recruitment of a replacement partner, retention bonuses for clients-at-risk and the legal costs of restructuring partnership agreements. Around 80 percent of the deceased partner's book is retained. The firm survives with revenue down 12 percent in year 2 rather than the 30 to 40 percent that would have occurred uninsured.

Illustrative pattern · TBC against a real anonymised case

Licensed trade business #03 · TBC

"Licensed builder, cancer diagnosis at 48."

Illustrative pattern. Licensed building practitioner running a small residential building company with 4 staff and 6 contracts on the go. Cancer diagnosis leads to a 12-month absence and an eventual return to limited duties. Key person trauma cover of $400,000 pays on diagnosis, funding the cost of bringing in a second licensed operator, completing the in-progress contracts and keeping staff employed through the gap. The business returns to full capacity with the licensed operator working in a senior advisory role rather than on tools.

Illustrative pattern · TBC against a real anonymised case

A related cover

Shareholder buy-sell cover.

If a business has two or more shareholders, key person cover is rarely the whole answer. Without a separate buy-sell agreement funded by life cover, the death of a shareholder typically leaves their family holding shares they can't easily sell and the surviving shareholders with a co-owner they didn't choose. Both sides lose.

Shareholder buy-sell cover solves the structural problem by combining three documents: a shareholders' agreement that requires the family to sell on death or TPD, a buy-sell agreement that fixes the valuation method, and life and TPD cover on each shareholder owned by the other shareholder (or by a trust on behalf of all parties). At claim time, the cover pays to the surviving shareholder, who uses the funds to buy out the family at the pre-agreed price. The family gets clean cash, the surviving shareholder gets full ownership, and the business continues with a single owner.

This is structurally different to key person cover but the two are usually written together. Most multi-shareholder NZ businesses that hold proper key person cover also hold buy-sell cover and the two are sized to address different risks: key person funds the business's loss, buy-sell funds the ownership transition.

Common questions

Key person cover, demystified.

What is key person insurance?

A policy owned by the business that pays a lump sum (or in some structures a monthly benefit) to the business if a defined key person dies, becomes terminally ill or becomes totally and permanently disabled. The benefit funds the cost of replacing that person and the lost profit during the transition.

Who actually needs key person cover?

Founders of revenue-generating businesses where the founder is also the primary rainmaker. Partner-led professional firms. Trade businesses built around one or two licensed operators. Businesses with concentrated customer relationships held by one individual. Any small business where the death or disability of one specific person would materially threaten the business.

How do you size key person cover?

Two main methods. The multiples-of-profit method takes the key person's share of net profit and multiplies it by the number of years the business needs to recover (typically 2 to 5 years). The replacement-cost method calculates what it would cost to recruit, train and bring up to capacity a replacement for the role. We model both and pick the higher of the two for the sum insured.

Is key person insurance tax deductible in NZ?

It depends on what the cover is structured to replace. If the policy is structured to replace lost revenue (a "revenue protection" policy), premiums are generally deductible and the benefit is taxable when received. If the policy is structured to cover a capital loss (replacing a director's capital contribution), premiums are not deductible and the benefit is not taxable. We work with your accountant to structure this correctly before binding cover.

What's the difference between key person cover and shareholder buy-sell cover?

Key person cover pays the business so it can absorb the financial shock of losing a key employee. Shareholder buy-sell cover pays a co-shareholder so they can buy out the deceased or disabled shareholder's family's stake at a pre-agreed valuation. Many small businesses need both, structured together with a shareholder agreement, a buy-sell agreement and the cover sized to match.

Can I write key person cover on someone who is not a shareholder?

Yes. The standard requirement is "insurable interest", which the business has in any employee whose death or disability would cause it material financial loss. A senior salesperson with a large book, a lead engineer who holds critical technical knowledge, or a general manager who runs operations are all common subjects of key person cover. The named individual must consent to being insured and undergo underwriting.

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