Telephone: (03) 9835 1300
Email: clientinfo@abcountrywide.com.au
Key Person & Business Succession Insurance
Key Person Insurance
Key person insurance safeguards your business in the event of a key person’s death, disability or significant medical event.
Why do I need Key Person Insurance?
The loss of a key person can have a devastating effect on the financial stability of the business. Key Person Insurance is designed to pay out a lump sum on the death or disability of the insured key person, during the length of the policy. It is paid as a lump sum and could significantly help the business to recover.
There are many ways to determine the need and quantify this in dollar and cents terms. The method used will be determined by what makes the person important to the business. Your business risk specialist will assist you in this process.
For instance, the person has given a personal guarantee for a business loan or has given a director’s loan to the business, then the need is simply the amount outstanding under the loan.
In other cases, when determining the needs of the business, it may also be necessary to take into account:
- The length of time it would take for the business to achieve the status quo prior to the key person’s death or disability;
- The funding required for a replacement recruit
- Anticipated profit reduction and/or
- Distribution to investors
Some of the factors which must be considered when determining needs are:
- Possible loss of customers
- Lead time for replacement to be effective
- Possible loss of production whilst training a new employee
- Additional cost of hiring a new employee
- Loss of credit rating
- Loss of credibility if current orders cannot be met
- Current loans may be called up
- Loss of goodwill
Contact us for all your personal insurance needs
Email: clientinfo@abcountrywide.com.au | Telephone: (03) 9835 1300
Street Address: Level 2, 35 Dalmore Drive, Scoresby Vic 3189
Postal: PO Box 9055, Scoresby Vic 3189
Key Person Insurance Scenario
Green Waste Pty Ltd are a niche waste recycling business. Mr. Right (an environmental specialist) is employed by Green Waste Pty Ltd and is largely responsible for providing recommendations and negotiating large contracts with local councils and businesses.
After recent discussions, the shareholders have realised that their business has started relying heavily on Mr Right’s sales, negotiation skills and expertise. If he were to become critically ill or die during the length of policy, their business could suffer and they could potentially lose up to 40% of their profits. In addition, they may have to recruit and retrain a replacement, which could take at least 1 year.
SCENARIO 1
They decide to take out a Key Person Protection Plan, which would provide the funds to deal with these problems should anything happen to Mr Right. With Key Person Protection in place – Green Waste Pty Ltd own the policy on Mr Right.
SCENARIO 2
Without Key Person Protection in place.
Business Succession Agreement (Buy/Sell)
When two or more parties share the ownership of a business, they each own shares in a company or units in a unit trust that carries on the business.
In the event one party dies or becomes disabled the other parties want to ensure they are able to purchase the outgoing party’s interest and in turn the outgoing party wants to ensure that their estate is paid a fair value for the interest.
Example
A, B and C own shares in XYZ Pty Ltd, a management consulting
business worth $1.5 million. They have a business succession (buy/sell) arrangement covering death or disablement. “A” dies suddenly of a heart attack, because an agreement is in place they should have a smooth transfer of ownership.
Funding Buy/Sell Arrangements with insurance
Business owners are utilising life insurance to provide the funds to purchase an outgoing owner’s interest. It is imperative that if the parties intend on funding either or all parts of the funds for the purchase via an insurance policy that a buy/sell agreement is in place.
Example
Assume X, Y and Z own equal shares between them in ABC Pty Ltd. A Buy/Sell option agreement is in place that gives each of them the option of forcing the sale to the other of their shares should any one party die.
X dies. Y and Z exercise their option to purchase X’s share from X’s estate. (Alternatively, X’s executor could exercise the option to force Y and Z to buy). The business is valued at $1.5m. X’s shares are worth $500,000. There is a life insurance policy in place on X for $500,000. The $500,000 is paid to X’s estate. X’s executor must transfer X’s share to Y and Z.
Contact us for all your personal insurance needs
Email: clientinfo@abcountrywide.com.au | Telephone: (03) 9835 1300
Street Address: Level 2, 35 Dalmore Drive, Scoresby Vic 3189
Postal: PO Box 9055, Scoresby Vic 3189
What happens if you do not have a buy/sell agreement in place?
The purpose of a buy/sell arrangement is to ensure a fair outcome for the parties carrying on a business, in the event one of them die or become disabled. Examples of problems that can arise if agreements are not in place
SCENARIO 1
A and B run a recruitment firm XYZ Pty Ltd. In the event A dies, his or her spouse offer to sell A’s share of the company for a fair price.
However, partner B decline the offer.
Partner B ends up setting up his/her own business AAA Pty Ltd over a period of 6 months and succeed in taking the XYZ Pty Ltd clientele with them. Therefore XYZ Pty Ltd becomes worthless and B gains A’s share for nothing.
SCENARIO 2
A and B run a restaurant together. B dies and A offers to purchase B’s share in the restaurant business from B’s estate. B’s Will left everything to his spouse. B’s spouse believed she had adequate management skills to run the restaurant and wants to take an active role in the business.
Although party A did not want this to happen, B has no choice and therefore B’s spouse attends to running of the restaurant. Her skills are not adequate for the business and thus results in profits deteriorating and no growth.
Business fails.
The Financial Services and Credit Guide contains information that will help you decide whether to use the financial services we offer.
Austbrokers Countrywide Life Pty Ltd
Corporate Authorised Representative Charter Financial Planning Ltd Australian Financial Services License No. 234665 ABN 28 152 479 162
FINANCIAL SERVICES AND CREDIT GUIDE
Issued: 19 December 2025
Austbrokers Countrywide Life Pty Ltd ABN 28 152 479 162 is a Corporate Authorised Representative of Charter Financial Planning Limited ABN 35 002 976 294 Australian Financial Services Licensee Licence number 234665.
Principal Address: Level 6, 88 Phillip Street SYDNEY NSQ 2000
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Disclaimer
Information provided on this website is general in nature and does not constitute financial advice. Austbrokers Countrywide Life Pty Ltd will endeavour to update the website as needed. However information can change without notice and Austbrokers Countrywide Life Pty Ltd does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time.
Every effort has been made to ensure that the information provided is accurate. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial planner to take into account your particular investment objectives, financial situation and individual needs. Austbrokers Countrywide Life Pty Ltd does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this website. Except insofar as any liability under statute cannot be excluded. Austbrokers Countrywide Life Pty Ltd, its employees and authorised representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person.