What are some of the ways this type of insurance may be structured and what are some of the tax benefits of how it is structured?
Key Person Income may generally be owned by a trust or business entity. Key Person Income cannot be held within superannuation.
Generally, where the purpose of the insurance is to protect the revenue of the business, such as by replacing lost sales, the premiums can be tax deductible and any payments assessed as income. Learn more in the BT Protection Strategies Business Owners guide.
The amount of the Total Disability Benefit is the lesser of:
- The insured monthly benefit; and
- The pre-disability monthly business income.
The calculation of pre-disability monthly business income is applied differently depending on whether the insured person is a key person business owner or key person employee.
If the insured person is a key person business owner, the pre-disability monthly business income is calculated based on:
A x B = C
A = a percentage, being the lesser of:
- the insured person’s ownership of the key person business at the date of disability;
- the average percentage of gross profit attributed to the insured person in the 12 months immediately preceding the commencement of total disability or partial disability; and
B = the average monthly gross profit of the key person business for the 12 months immediately preceding the commencement of total disability or partial disability.
C = pre-disability monthly business income.
Sam and Brendan own equal shares in a cosmetic dental surgery, S and B Dental. The gross profit for S and B Dental is $1.5 million per annum and Sam and Brendan are each responsible for generating 35% of the gross profit ($525,000 each).
Therefore, (35% x $1.5 million) divided by 12, equals the pre-disability monthly benefit of $43,750.
If the insured person is a key person employee, the pre-disability monthly business income is calculated based on the insured person’s average monthly earnings in the 12 months immediately preceding the commencement of total disability or partial disability multiplied bykey person factor*.
Anna is employed as a full time dentist by S and B Dental. She has developed relationships with many of the patients, and is responsible for generating 30% of the gross profit ($37,500 per month). Anna’s gross monthly earnings** is $16,250.
Therefore, 150% x $16,250 equals a maximum monthly benefit of $24,375.
* This is the percentage of monthly earnings we agree to replace at the time of claim, and is shown in the policy schedule.
** Monthly earnings is the normal monthly value of the remuneration package paid to the person including salary, superannuation contributions, fees, commissions, regular overtime and bonus payments and packaged fringe benefits. Monthly earnings are calculated as gross.