[1] Many businesses have a key person who is responsible for the majority of profits or has a unique and hard to replace skill set that is vital to the organisation.
An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company.
The company would need to consider how they would be impacted as a result of a loss of a key person in different ways to determine how much that individual is worth.
[citation needed] In Australia, key person insurance policies are generally not deductible unless used specifically for business revenue protection purposes.
Claim proceeds in Australia if used for revenue purposes may be taxable and, depending on the ownership of the policy, may trigger a capital gains taxation event.
In the UK the main principles of key person insurance taxation were outlined by the Chancellor of the Exchequer in 1944, Sir John Anderson.
Essentially, key person insurance can be tax-efficient, but it is always best to check with a financial advisor or the local tax office before making assumptions.