mifinance

WRITER Michael Osbourne

Could your practice continue to operate if one of its key people were to suddenly pass away, be diagnosed with a terminal illness, or become unable to fulfil their role for a period due to a medical condition? Would the other practice owners or partners cope financially? These are the kinds of uncertainties key person insurance can protect your practice from.

It’s not the most enjoyable aspect of practice planning but an essential and often overlooked factor for practice owners or managers to consider. Michael Osbourne from Avant Life Insurance provides a wrap-up on what you need to know.

When taken out by an eye care practice, key person insurance typically includes one or more of the following life insurance covers:

• life cover,
• total and permanent disability (TPD) insurance, or
• trauma cover.

The practice owns the policies and pays the premiums, and if something happens to the key person(s), its financial position is protected and the practice may be eligible to claim a lump sum. This is different from similar types of policies that may be owned personally or through a person’s superannuation fund.

When the practice makes a claim, the entity will receive the insurance benefit, normally paid in a lump sum (some insurers will offer monthly benefits). The benefit can be used for revenue and/or capital purposes, to ensure the practice can continue to operate and cover the costs associated with losing an essential staff member.

Another additional cover to think about is business succession insurance. This type of cover protects the practice if ownership changes due to unforeseen events, such as the owner’s death or incapacitation. It usually forms part of funding buy/sell arrangements in shareholders’ agreements.

WHO IS A KEY PERSON?

Key persons are essential to the day-to-day operations, revenue generation, and overall functioning of your practice. They can include business owners, founders, key executives, employed practitioners, or anyone whose absence or loss would have a substantial financial impact on the company.

Depending on the size and nature of your practice, you may have more than one key person. For example, if you run a rural eye care practice and employ three eye health professionals, all three could be classified as key persons because their knowledge, skills, and experience are crucial to the success of your practice.

WHAT CAN YOU USE KEY PERSON INSURANCE FOR?

This type of insurance can provide your practice with financial protection in several different ways, including mitigating revenue loss from the death, sickness, or invalidity of the key person, covering replacement costs, servicing debts, addressing goodwill write-downs, providing liquidity, and maintaining supplier relationships (Figure 1).

HOW MUCH COVER WILL YOU NEED?

To help you to decide how much cover you need to take out, consider the following factors:

• How much remuneration does the key person(s) receive?
• What is the key person’s contribution to the profitability of your practice?
• How much will it cost to recruit and train a replacement(s)?
• Are there any practice debts, including any outstanding loans for which the key person may be a guarantor?
• Are you looking to cover more than one person?
• Are there any tax consequences that need to be factored into the calculation?
• How long will it take to find a suitable replacement?

Ultimately, how much cover you decide to take out will depend on the circumstances of your practice and the nature of each key person’s contribution. A qualified financial adviser can recommend the right strategies to help you understand the complex nature of key person insurance.

SUMMARY

Key person insurance is not a life insurance product, but a strategy that uses life insurance products for a specific business purpose. When used appropriately, key person arrangements can protect your eye care practice from the financial consequences of unexpected events. This usually involves taking out policies that insure the lives of the key person(s), where the practice pays the premiums and receives the benefit from a claim.

When deciding how much cover you need, there are multiple factors, including tax implications, to consider. However, it comes down to the nature of your practice and the financial contribution your key person(s) makes.

If you are thinking about taking out key person insurance, it is important to seek professional advice tailored to your personal circumstances.

Michael Osbourne is a Life Insurance Adviser/ Business Development Manager with Avant Life Insurance and specialises in personal and business life insurance advice, with a particular focus on medical and allied health professionals. Based in Sydney, he is an authorised representative of Avant Life Insurance, working with clients from early career practitioners through to established specialists and practice owners. Visit: avant.org.au/life-insurance-advice.

Avant Life Insurance is a registered business name of Doctors Financial Services Pty Limited (ACN 610 510 328, AFSL 487758) (DFS). The information provided by DFS is general advice only and has been prepared without taking into account your objectives, financial situation, and needs. You should consider these, and relevant Product Disclosure Statement or policy wording (available by contacting DFS on (AUS) 1800 128 268) having regard to the appropriateness of the advice before deciding to purchase or continue to hold these products. The authors, DFS, and mivision accept no responsibility or liability for any loss or damage that may arise from reliance on this article. Information is only current at the date initially published. © Avant Mutual Group Limited 2026.