Best Key Person Insurance

What is key person insurance, and how does it work?

Key person (key man) insurance is a business insurance policy that provides a monthly or lump sum payout if a business owner, director, top executive, or critical employee passes away or cannot work due to a total long-term or permanent disability. This cover helps companies: 

• offset lost revenue
• recruit and train a replacement
• continue operations
• meet targets, deliverables, and client commitments
• settle outstanding debt
• maintain stability during a difficult transition.

How it works

The business owner or someone with a pertinent interest in the company takes out a policy on the key person’s life, pays the premiums, and receives the payout if a claim is made. The company can use the funds to manage the financial impact of losing a key individual.

Who is considered a key person?

A key person is an essential team member whose expertise, leadership, or client relationships are critical to the company’s success. This includes:

• Business owners, founders, and shareholders
• CEOs, directors, and senior managers
• Top sales executives
• Specialists with unique skills vital to operations.

Some insurers have more specific definitions or requirements than these, such as that key persons should have an operational role in the company or produce at least 20% of the company’s gross income.

Why should business owners get key person insurance?

Key person insurance helps businesses navigate unexpected challenges and remain financially stable.

Here’s why small to large business owners and start-ups in New Zealand should consider it:

• Financial stability: The death or incapacity of a key person, such as a founder or top earner, can disrupt cash flow. Insurance provides a lump sum to offset lost revenue or profits.
• Business continuity: Start-ups often rely heavily on one or two individuals. A payout ensures the company can keep operating and evolving while finding a replacement.
• Recruitment and training costs: Replacing a key person is expensive and time-consuming. Funds from the policy can cover hiring and onboarding, easing the transition.
• Debt and creditor confidence: Many businesses have loans tied to a key individual’s performance. Insurance reassures lenders and prevents forced liquidation if that person is lost.
• Client retention: Key persons often maintain valuable client relationships. A financial buffer helps uphold service levels and reduce client loss.
• Peace of mind: For small teams or family-run firms, key person insurance protects livelihoods, ensuring the business survives unexpected tragedy.

What can happen to your business without key person insurance?

Without key person cover, a business may face:

• Operational disruptions: Struggles in maintaining functionality, productivity, and leadership
• Severe financial losses: Cash flow strains caused by loss of income and increased costs
• Loan defaults: Inability to meet debt obligations if the key person was a guarantor
• Investor and lender uncertainty: Potential loss of confidence from stakeholders
• Business closure risk: For small businesses and start-ups, losing a key person may lead to permanent closure.

Key person insurance cover: Features and benefits

Key person insurance protects businesses from the financial impact of losing indispensable team members.

Note that benefits, payout structures, and other features vary across insurers and plans. Insurers offering monthly benefits may also provide higher maximum payouts and longer payment durations to established businesses as compared to new ones.

Here’s what key person insurance typically covers:

• Death and terminal illness: Most policies offer a lump sum payment if a key person passes away or is diagnosed with a terminal illness that’s expected to result in death within 12 months.
• Total long-term or permanent disability: Pays out benefits if a key person suffers a total and long-term or permanent disability that prevents them from working or leads to the termination of their employment. 
• Multiple key persons insured: Businesses can insure more than one key individual, recognising that multiple employees may be crucial to operations. 
• Benefit payment duration (for plans with monthly payments): 6 months to 2 years for each key person.
• Waiting period (for plans with monthly benefits): You can choose a waiting period from 2 to 13 weeks before the benefit payment commences.
• Conversion options: Insurers provide options to convert key person insurance to alternative policies (such as income protection, life insurance, or other types of business cover).

Maximum cover amounts

The maximum amount each key person can be insured for varies by provider. Some insurers provide new businesses (those operating for three years or less) with maximum monthly payments ranging from $4,000 to $9,000. For established businesses, this amount can extend to $30,000 per key person, while other policies calculate monthly payments based on your company’s revenue.

Lump sum benefits start at $20,000, with a cap of $6 million for all combined lump sum policies, such as permanent loss of key person, trauma, TPD, ownership buyout, and debt protection.

In today’s volatile business market, choosing appropriate key person insurance is crucial for commercial stability. Consulting with an insurance adviser can help you tailor your cover to meet specific business needs and ensure adequate protection.

How to get free key person insurance quote comparisons

Engaging a business insurance broker, such as Policywise, to compare key person insurance quotes offers distinct advantages over approaching insurers directly. Here’s why:

• Specialist expertise: We provide informed advice, clarifying policy details and aligning cover with your needs.
• Broader market access: We source quotes from multiple insurers, ensuring comprehensive options beyond a single provider.
• Efficiency: We manage the comparison and application process, saving you valuable time.
• Cost-optimisation: We identify competitive premiums and potential savings to suit your budget.
• Tailored solutions: We evaluate your business to secure precise, effective cover, avoiding under- or over-insuring.

A broker delivers professional insight and efficiency that direct channels cannot replicate.

To receive a customised key person insurance quote comparison, simply provide the following details about your key person(s):

• Date of birth 
• Gender 
• Occupation
• Salary

Policywise can supply a free, no-obligation quote comparison tailored to your needs. It’s a quick and easy way to explore the best insurance options for your business.

How much does key person insurance cost?

The cost of key person insurance in New Zealand can vary, but a professional insurance broker like Policywise will assist clients in optimising their premiums. Below are the key determinants and how we help:

• Age and health of the key person: Younger, healthier individuals who are also non-smokers typically attract lower premiums due to reduced risk.
• Role and influence: The more critical the individual’s contribution to the business, the higher the potential payout, which can increase costs.
• Cover amount: Larger sums insured result in higher premiums, so businesses must balance adequate protection with affordability.
• Policy duration and type: Longer terms and comprehensive covers (e.g., adding optional benefits) may raise costs.

How brokers help reduce insurance costs

As brokers, we curtail unnecessary expenses by:

• Analysing market comparisons: Accessing tailored quotes from insurers to find competitive rates
• Negotiating terms: Leveraging insurer relationships to adjust waiting periods, exclude unnecessary add-ons, or secure scalable cover for growing businesses
• Mitigating risks: Advising on accurate sum assured calculations to avoid over-insuring
• Ensuring tax-efficient structuring: Ensuring premiums align with IRD guidelines to maximise deductibility
• Optimising policy structure: Recommending cost-saving options, such as bundling key person cover with other business policies.

Keep your key persons insured with Policywise

An insurance broker offers quality advice, comparisons, and access to insurance cover that aligns precisely with the unique needs of your business. Unlike insurance providers, brokers represent the client (you), advocating for your best interests at all times.

Policywise is dedicated to helping Kiwis achieve financial resilience through the intelligent use of appropriate insurance products. Our team provides thorough, market-current research to help you make informed decisions about your insurance requirements.

By choosing Policywise, you gain a trusted partner in securing the best insurance solutions for your business plus all the assistance and support you need.