Income Protection vs. Key Person insurance –Why? When?

In discussing insurance options with our clients, we often find there is an awareness of either Income Protection insurance, Key Person insurance, and occasionally both.  Most people however are uncertain as to what each does, and when one is applicable over the other.

What does Income Protection and Key Person insurance have in common?

The objective of both cover’s is to provide you, the business owner, with a financial safety net in the event you suffer injury or ill-health.

So how are they different?

Income Protection cover pays a monthly benefit to you until you can return to work.  This benefit is typically up to 75% of your normal income.  A waiting period applies, often 30 days, in which you must support yourself, and then if you remain unable to work, your benefit payments commence.  In most cases they pay for a period of months until you return to work and things return to normal.  Most of the quality products will cover you through to age 65 if required, so if you suffer a long term illness or injury, your Income Protection cover will provide you with an on-going wage which rises in line with inflation.

Income Protection premiums are tax deductable, and as a consequence any benefit paid is taxable.

Key Person insurance differs in that it pays an agreed lump sum.  Whereas the payout conditions for Income Protection are that you are unable to work due to illness or injury, for Key Person insurance, the payout conditions are listed in the policy – cancer, heart attack, stroke etc, as well as death and total and permanent disability. 

So whereas a broken leg that sees you off work from 3 months might trigger 2 months on Income Protection benefits (allowing for a 30 day waiting period), no Key Person payout would apply.  In contrast however, where you are diagnosed with cancer, the Key Person cover will immediately pay out your lump sum benefit, perhaps $100,000 for instance, with no requirement to demonstrate an inability to work.  The benefit amount does not have to be tied to your income, it might for instance be determined based on how much you would need to clear debt, or cover medical costs. With Key Person cover it is very black and white – suffer one of the listed conditions, and you will receive a cheque.

So which one is right for me?

To answer that we really need to have a chat with you and understand your circumstances.  Typically, for a one person business or small business where the owner is crucial to the generation of revenue, Income Protection would be the priority.  For a larger business where, if the owner was away for a couple of months the business would carry on okay, then Key Person cover is more likely to be relevant, as it will only pay on the more significant issues, and can pay a much larger sum.

Having a financial safety net in place is absolutely crucial for business owners and it is amazing how many business owners will get things like buildings and vehicles insured, yet have no cover in place should they suffer a serious medical problem.

Give us a call on 03 9870 6544.  We can review your current arrangements, and provide recommendations and costings for your consideration.

Important Notes

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives and should NOT to be construed as legal, professional or financial product advice. You should obtain a Product Disclosure Statement and consider obtaining personal financial advice from an Australian Financial Services Licensee, or representative thereof before making the decision to acquire, vary or dispose of any financial product.

Whilst all reasonable efforts are made to ensure that the information contained herein is accurate and reliable the parties make no representation or warranty regarding the correctness or reliability of the information provided.

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