5 signs your business should consider key person insurance

Most New Zealand business owners know they probably should have key person insurance. Far fewer actually get around to putting it in place. 

It's not because they don't care — it's because the risk feels abstract until it isn't. And by then, it's too late. 

Here are five signs that your business genuinely should consider key person cover — along with what you stand to lose if you don't have it. 

1. Your business revenue depends on one or two people

If a single person — you, a business partner, or a star performer — is responsible for a significant portion of your business's revenue, that's a concentration risk that needs addressing. 

Ask yourself: what would happen to your revenue in the six months after this person became unable to work? If the answer makes you uncomfortable, that's the sign. 

Key person insurance can provide monthly payouts to cover revenue shortfalls while you find a solution — or a lump sum to help you rebuild if the absence is permanent. 

2. Your business has knowledge that lives in one person's head

Specialised knowledge, supplier relationships, client history, technical know-how — in many Kiwi businesses, this kind of institutional knowledge lives with one person and isn't formally documented anywhere. 

When that person is absent, operations don't just slow down. They can stop entirely for certain functions. 

If you've ever said 'only Sarah knows how that works' or 'you'd need to ask Dave about that client' — you have a key person risk. Insurance won't transfer the knowledge, but it can help fund the time and cost to rebuild it. 

3. You're in a business partnership

Business partnerships are common in New Zealand — and they're particularly vulnerable to key person risk.

If your business partner became seriously ill or died, would you be able to run the business alone? Could you afford to buy out their share? Would their family become your new business partner?

Key person insurance combined with shareholder protection insurance can give partnerships a clear financial pathway through exactly these scenarios. Without it, the surviving partner is often left in an extraordinarily difficult legal and financial position.

4. Your business has loans or financial obligations tied to key person performance

Many small business loans in New Zealand require personal guarantees from directors or key shareholders. Others are sized based on business revenue that's tied to specific individuals.

If a key person's absence would put your ability to service debt at risk, lenders will want to know your plan. Some will require key person cover as a condition of financing.

Even if it's not required, it's prudent — a monthly key person payout can help protect from your loan commitments defaulting during a period of disruption.

5. You haven't reviewed your business risk in the last 12 months

This one is less about a specific risk and more about the reality of how most NZ businesses operate: business risk reviews don't happen often enough, and when they do, key person risk is frequently overlooked.

If you've grown your team, added a high-value employee, taken on a major client, or taken out business debt in the last year — your key person risk profile has changed.

Annual reviews with a specialist broker can identify gaps before they become crises.

What happens if you don't have it?

The reality

Industry data consistently shows that small businesses that experience an unplanned key person loss — without financial protection in place — face significant risk of closure within 12 months. Revenue drops, recruitment is costly, and the psychological impact on remaining staff compounds quickly. Key person insurance doesn't eliminate this risk, but it gives your business a fighting chance.

How to get started

Getting key person insurance doesn't require a lengthy process. The main steps are: 

• Identify your key people (those whose absence would most affect your business) 
• Estimate the financial impact of their absence — revenue, recruitment, and recovery costs 
• Speak with a specialist broker who can structure cover to match your actual risk 

Marsh has helped New Zealand businesses of all sizes manage exactly this risk. Our brokers understand the specific pressures Kiwi SMEs face and can recommend cover that's proportionate, practical, and affordable.

A common scenario for NZ businesses

Example

A Wellington-based engineering consultancy has business interruption insurance in place — arranged when they signed a new office lease. They feel well covered. Their lead engineer — the person who manages three of their five major contracts, holds the key client relationships, and carries fifteen years of technical knowledge — is diagnosed with a serious illness requiring eight months off work.  Their BI policy doesn't respond. There's no physical damage event. The business faces eight months of revenue disruption, contractor costs, and client management challenges with no financial buffer in place.  It's not that they were uninsured. They were just insured for the wrong risk.

How to think about the two covers together

Business interruption insurance and key person insurance are complementary, not competing. Most businesses that take risk management seriously will benefit from having both. 

A useful way to think about it: business interruption insurance protects your operations infrastructure. Key person insurance protects your people infrastructure. Between the two, you have a much more complete picture of business continuity. 

For New Zealand SMEs in particular — where teams are small, roles are concentrated, and there's limited redundancy built into the organisation — the people risk is often the greater of the two. 

Questions worth asking about your current cover 

If you have business interruption insurance in place, it's worth asking: 

• Does your cover extend to the absence of a key person, or only to physical and property events?
• If your most critical team member was absent for six months tomorrow, what would that cost the business — in lost revenue, contractor cover, and recovery?
• Is that exposure currently insured?

If the answer to the last question is no — or you're not sure — a conversation with a specialist broker is a sensible next step.

Getting the right protection in place

Marsh has been helping New Zealand businesses manage risk for over 60 years. Our brokers can review your current cover, identify gaps in your business continuity protection, and recommend a combination of solutions — including key person insurance — that reflects your actual risk profile. 

LCPA 26/NZ133