The aim of business revenue protection insurance is to maintain the business in the same, or similar, situation as it was prior to the death or incapacity (temporary or permanent) of a key person.
Business revenue protection insurance is a type of "key person insurance". The other type of key person insurance is business asset protection insurance.
Who is a key person in a business?
Most businesses have one or more key persons whose skill, knowledge, experience and/or leadership are pivotal in generating revenue. A key person may be one or more of a number of employees or business principals.
They include:
- a revenue producer, such as a salesperson;
- those that are integral to the output of a business, e.g. the factory manager, office manager;
- the owner of key intellectual capital; and
- the name behind the business (i.e. goodwill).
How does key person insurance work?
Key person insurance is generally effected by businesses owning life insurance products (life, TPD and trauma insurance) on key persons to the business. The purpose/structure/quantum of key person revenue insurance for a particular business will depend on:
whether the key person is also a business principal;
- the business’ business model/plan;
- attrition of key persons in the business;
- whether the key person is temporary or permanently incapacitated; and
- the specific skill set/expertise/leadership of the key person.
What does business revenue protection insurance cover?
Business revenue protection insurance provides cash so that a business can:
- be compensated for the loss of revenue (i.e. the fixed costs of the business must still be met irrespective of reduced revenue because of the loss of a key person);
- fund the associated replacement costs of the key person (e.g. training costs, recruitment fees);
- enable bank finance repayments to continue to be met despite the reduced revenue.
- protect the business owner’s profit; and
- maintain the value of the business as a going concern.
Is key person insurance tax deductible?
Key person insurance premiums are tax deductible and proceeds assessable where the purpose of the insurance was to fill the place of a ‘revenue’ receipt.
In order for premiums to be deductible and proceeds to be assessable the following must occur:
- The policy must be a term insurance policy.
- The policy must be owned by the trading entity on the life or disability of a key person (e.g. by an employer on the life of a key employee).
- The purpose in effecting and maintaining the policy must be of a revenue nature,
- The employee must be a key person, that is “the loss of that employee would result in a significant loss of profits being derived by the employer.”
- The business must continue.
- The sum insured is based on a reasonable estimate of the loss of revenue that would be likely to occur.
