Why underinsurance warnings matter for businesses with key people

For business owners, underinsurance is not only about whether a policy exists. It is about whether the cover amount, policy purpose, ownership structure and benefit type still match the commercial risk. A business may have some key person cover in place, but if revenue has grown, debt has increased, margins have changed or one individual has become more central to client relationships, the original sum insured may no longer be fit for purpose.

The renewed focus also sits alongside the broader advice reform debate. Industry bodies have argued that simpler, more accessible advice could help Australians make better insurance decisions before a crisis occurs. That matters because key person insurance is rarely a simple off-the-shelf decision. The right structure can depend on whether the policy is intended to protect revenue, repay debt, fund ownership changes, support recruitment or reassure lenders and investors.

There is also a cost dimension. Premium pressure across parts of the life insurance market has made some businesses reluctant to review cover, particularly when cash flow is tight. However, reducing or avoiding cover without understanding the potential financial impact can create a larger risk. A practical review should compare premium affordability against the possible cost of lost sales, project delays, loan covenant stress, replacement hiring and reduced stakeholder confidence.

A useful starting point is to identify who is genuinely critical to the business, then estimate a realistic sum insured based on measurable exposures rather than guesswork. Consider revenue dependency, gross profit at risk, outstanding liabilities, expected disruption period and replacement costs. The result may show that cover is adequate, excessive or poorly aligned across life, total and permanent disability and trauma-style benefits.

The key message is not that every business needs more insurance. It is that underinsurance often develops quietly as a business changes. Regular reviews, clear documentation and advice that takes account of commercial objectives can help ensure key person protection remains a genuine continuity tool rather than a policy that looked suitable several years ago.