Protect the revenue that walks out the door with one person

Key person insurance NZ, common questions.

Quick answers to what New Zealand business owners ask us most. Something not covered? Give us a call.

• What is key person insurance in New Zealand?

  Key person insurance is cover owned by a business on the life or health of a person the business depends on – an owner, a director, a lead salesperson, a technical specialist or a general manager. If that person dies, is diagnosed with a serious illness or becomes disabled, the business receives the money rather than the family, and uses it to keep trading while it recovers or replaces them.

• How is it different from shareholder protection?

  Key person cover deals with revenue and continuity – it buys the business time. Shareholder protection deals with ownership – it buys the shares. A single owner-operator company may need both, because losing that person creates a trading problem and an ownership problem at the same time.

• Are key person insurance premiums tax deductible in New Zealand?

  It depends on the purpose of the cover. Inland Revenue's position (see QB 17/06) is that where a policy is taken out to compensate the business for a loss of profits from the death or incapacity of a key employee, the premiums are deductible and any payout is taxable business income. Where the purpose is capital – repaying a loan or funding a buy-out – premiums are generally not deductible and the proceeds are generally not taxable. You can't have both treatments on the same purpose, and where a policy serves more than one purpose apportionment may be needed. Confirm your position with your accountant.

• Does fringe benefit tax apply?

  Where the business owns the policy and receives the claim, and the insured employee has no right to the proceeds, Inland Revenue's view is that FBT does not apply. If a policy is instead taken out for the benefit of an employee or their family, different rules apply and FBT can be payable on the premiums – which is a common trap when key person cover and staff benefits get mixed up in the same policy.

• How much key person cover does a business need?

  There's no single formula. Common approaches are a multiple of the person's contribution to gross profit, the cost of recruiting and training a replacement plus the revenue shortfall during the gap, or the amount of debt and fixed costs the business would still have to service. We usually build it from the actual numbers: fixed overheads, the revenue directly attributable to that person, and how long a realistic replacement would take to find and get productive.

• Who can be insured as a key person?

  Anyone whose absence would measurably hurt the business – working owners and directors, sales staff who hold the client relationships, technical or licensed staff whose qualifications the business trades on, and operational managers who hold the systems together. The insured person has to consent and be underwritten, and the business needs to be able to demonstrate an insurable interest.

• Does the payout go to the business or the family?

  Proceeds are always paid to the policy owner. For key person cover that's the business, which is exactly the point – the money is there to keep the company trading. The insured person's family is looked after by their own personal life, trauma and income protection cover, which we recommend keeping separate and clearly documented.

• What can the money actually be used for?

  Whatever the business needs to survive the disruption. Common uses are covering fixed overheads while revenue dips, recruiting and paying above market for a replacement, funding contractors or an interim manager, retaining nervous staff, servicing loans and meeting bank covenants, and paying out an entitlement without draining working capital.

• Can key person cover include serious illness rather than just death?

  Yes, and it's often the more useful part. A trauma or critical illness benefit pays on diagnosis of a covered condition such as cancer, heart attack or stroke, which is a far more likely disruption than death. Total and permanent disability, and permanent loss of key person benefits, can also be added depending on the insurer.

• We're a two-person business – is this worth it?

  Small owner-dependent businesses are usually the most exposed, because there's no bench and no spare capacity. If one person holds the client relationships, the licence, the pricing knowledge or the bank relationship, the business can look healthy right up until that person stops. Cover doesn't fix that dependency, but it buys the months you'd need to work through it.