Being a sole trader in New Zealand comes with freedom and independence, but have you ever thought about what would happen to your business if you suddenly couldn’t work? 🤔 Key person insurance might not be the first thing that comes to mind when you’re busy running your own show, but it can be a real lifesaver for one-person businesses. In this post, we’ll break down what key person insurance is (in plain English), why it’s especially important for sole traders, and how it helps protect both your business and your family. No complicated finance jargon – just the info you need, as if we’re having a friendly chat over a cuppa.
What Exactly Is Key Person Insurance?
Key person insurance (sometimes called “key man insurance” or “business continuity insurance”) is a type of cover that protects your business if an essential person – you, in the case of a sole trader – is unable to work due to death or serious illness/injury. Think of it as a safety net or a “plan B” for your business. Unlike personal life or health insurance which pays you or your family, a key person policy pays the business. In practical terms, this means your business could receive:
Monthly payments to keep things running until you recover and return to work, or
A lump-sum payout that can be used to pay off business debt, cover expenses, or even wind up the business in an orderly way if you’re not coming back.
In short, key person insurance ensures your business has the funds to survive the “worst-case scenario.” It’s money that can cover lost revenue, hire someone to fill in for you, or take care of ongoing costs while you’re out of action.
How Is It Different from Personal Life or Health Insurance?
You might be wondering: “I already have life insurance and health insurance – isn’t that enough?” Not quite. Key person cover is different from personal insurance in a few key ways:
Purpose of Payout: Personal life insurance typically pays a benefit to your family or other beneficiaries if you pass away. Health insurance pays for your medical bills. Key person insurance, on the other hand, pays money to your business to offset financial losses if you’re gone or unable to work. It’s about keeping your business afloat, not just covering personal costs.
Income vs. Business Expenses: If you have income protection insurance, that policy will pay you a portion of your usual income if you can’t work due to illness or injury. That helps you pay your personal bills. Key person cover is designed to help with business expenses and recovery – things like covering overheads, paying employee wages (if you have any), or hiring temporary help to serve your customers. One way to think of it is: income protection tends to your income, while key person insurance tends to your business’s income and costs.
Who’s the Beneficiary: With personal insurance, you or your loved ones receive the payout. With key person cover, your business is the beneficiary. For a sole trader, your business finances are basically your finances – but having that distinction can make a big difference in how the money is used (e.g. paying off a business loan versus paying off your mortgage).
Both personal and key person insurances are important, especially for self-employed folks. In fact, many self-employed Kiwis have a mix of covers to protect both their family and their business. For example, you might have an income protection policy to look after your personal living costs and a key person policy to make sure your business doesn’t go under while you’re recovering. The good news is a financial adviser can help tailor a package that suits your situation.
Why Sole Traders Are Especially Vulnerable
If you’re a sole trader, you already know the truth: you are your business. There’s no big team or corporate structure behind you – it’s all on your shoulders. That independence is great when things are going well, but it becomes a big risk if something sidelines you.
Consider a few points about the small business landscape in New Zealand:
The majority of NZ businesses are one-person bands. About 71% of New Zealand’s small businesses are sole traders with no employees at all. (Yep, you’ve got a lot of company in the solo business club!). Small and medium enterprises (SMEs) make up over 95% of all NZ companies, so our economy leans heavily on people like you.
Unlike a larger company, a sole trader business often can’t fall back on someone else if the owner is out of action. Big firms might have layers of staff to pick up the slack if a key person gets sick; small businesses usually don’t. As one insurance expert put it, losing a key person has a much bigger impact on a small business than on a large corporate – big companies have more resources and “deep pockets” to cope, while a small business can quickly run out of cash if the owner is gone.
Many sole traders also don’t have the luxury of large savings or backup plans. In fact, it’s observed that there’s a large level of under-insurance among SMEs for key person risks. We tend to think “she’ll be right” and hope for the best, but that can leave us financially exposed.
Now, imagine the scenario: You’re a self-employed plumber with a steady stream of clients, or perhaps a freelance designer juggling multiple projects. If tomorrow you were in a car accident or fell seriously ill, what would happen? Without some kind of backup plan, your business could stall overnight. You might have to cancel jobs (disappointing your clients and losing income), while still owing money on your van, equipment, or software subscriptions. Plus, you’ve got personal bills to pay and family members who rely on your income. It’s a tough spot that unfortunately many sole traders have found themselves in.
And remember, it’s not just dramatic accidents – even an unexpected illness could knock you out of action. Sure, we have ACC in New Zealand, which covers some loss of income if you’re injured in an accident. But ACC doesn’t cover illnesses or many non-accidental health issues, and it might not fully replace your earnings if you’re a high earner. So, if you get something like a serious illness (say, a cancer diagnosis or a bad case of pneumonia that lands you in bed for two months), ACC won’t pay you a cent for that because it’s not accident-related. This is where insurance comes in – to fill those gaps and make sure one setback doesn’t snowball into losing your entire livelihood.
💡 TIP: ACC CoverPlus Extra is a flexible option for self-employed Kiwis. It lets you agree in advance on the level of income you want covered if you're injured, meaning you’re not relying on fluctuating income assessments. While it’s still limited to injuries, pairing this with personal income protection and key person insurance gives you much better all-round protection – especially when illness or long-term disability could impact you more than a physical accident.
In short, sole traders are vulnerable because everything rides on one person. If that person (you) can’t work, the business and personal income both take a hit. Key person insurance is about planning for that “what if” so that a run of bad luck doesn’t mean closing up shop for good.
Real-Life Scenario: The Unexpected Can (and Does) Happen
To paint a clearer picture, let’s look at a hypothetical scenario. Meet Josh, an independent electrician based in Taranaki. Josh is a one-man business (a sole trader) with a great reputation. He’s booked out months in advance, and his income supports his young family. Then, out of the blue, Josh suffers a severe back injury while lifting heavy gear. Doctors tell him he needs surgery and a minimum of 6 months off work for recovery.
Without key person insurance: Josh’s business is in trouble. He can’t physically do the work, so all those jobs he had lined up are now cancelled. Clients have to call someone else, and Josh risks losing them to other electricians for good. Meanwhile, his business expenses don’t stop – he’s still got a van loan to pay and expensive tools sitting idle. With no revenue coming in, Josh starts burning through personal savings to cover both business costs and household bills. In a few months, those savings run dry. The stress is through the roof. Eventually, he might have to shut down his business entirely to focus on recovery, hoping he can start over later (and rebuild his client base from scratch).
With key person insurance: The story looks a lot different. Josh had the foresight to take out a key person insurance policy a year ago. After his injury, his policy kicks in and the insurer provides a monthly payout to his business (in this case, to him, since he is the business). That money is enough to cover his van payments, tool insurance, and even hire a subcontractor to service some of his clients on his behalf for a few months. Yes, his profits are lower than if he were working, but the key person cover provides a vital cash injection to keep the business afloat​. His clients are informed and many stick with him, willing to have the substitute electrician or reschedule non-urgent work until Josh is back on his feet. Importantly, Josh’s family doesn’t have to dip into their emergency fund or worry about losing the house – the business expenses are handled, and Josh also had an income protection policy for personal bills. After six months, Josh is healthy again and jumps back into a business that’s still running, with customers waiting, rather than having to start from zero. The difference is huge.
Scenarios like this happen more often than you’d think. Life is unpredictable – but with a bit of planning (and the right insurance), you can make sure a curveball doesn’t knock out your livelihood. As one saying goes, when it comes to insurance, “hope for the best, but plan for the worst.” Key person insurance is that plan for the worst, especially for sole traders.
How Key Person Cover Protects Your Business and Your Family
You might be thinking, “Okay, so key person insurance helps my business survive if I’m out of action. But how does that help me and my family, really?” The truth is, your business and personal lives are tightly intertwined when you’re self-employed. Keeping the business healthy directly protects your personal financial security.
Here are some of the ways key person insurance can safeguard both your business and your family’s wellbeing:
Covers Operating Costs: The payout can cover your ongoing business expenses – think rent for your workspace, vehicle lease, power bills, or even employee wages if you have staff​. This means you’re not scrambling to pay these from your personal savings, and those services (internet, electricity, etc.) stay connected even while you’re off sick.
Replaces Lost Revenue: If you can’t work and generate income, a key person policy can replace some of that lost revenue for a while​. It’s like the business giving itself a paycheck. This is crucial for meeting not just business costs but also for keeping some money coming into your household. Your family might continue to receive a portion of what you used to earn, via the business, so they’re not left high and dry.
Pays Off Debts or Loans: Many small businesses carry a bit of debt – a loan for equipment, a business credit card, or a mortgage on a home office. A lump sum from key person insurance can clear those debts​, so neither your business partners (if any) nor your family are stuck with them. For sole traders, your business debts are your personal debts, so this is a big deal. It could mean the difference between keeping the family home or not, in a worst-case scenario.
Funds a Temporary Replacement or Extra Help: Let’s say you’re out for a while but the business could continue if someone did the work in your place – perhaps a contract driver for your delivery service, or an assistant to keep your online store running. The insurance payout can help hire and train a replacement in the interim​. Yes, it’s an added cost, but if the policy is covering it, you can retain your clients and goodwill. Your customers get continuity, and you have a business to come back to.
Provides Peace of Mind for the Family: Intangibly, having this cover can reduce a lot of stress for your family. Your partner or kids won’t be panicking about how to pay the bills while you’re in hospital or recovering. They also won’t be burdened with tough decisions about the business right away – the insurance gives a cushion of time. For example, if the worst happens and you pass away, a key person payout to your business could allow your family some breathing room to decide what to do with the business – whether that’s selling it, closing it down properly, or maybe even stepping in to run it if feasible. They won’t be pressured to fire-sale your equipment or liquidate assets immediately because there’s no cash – the policy money is there to cover things in the short term.
In essence, key person insurance acts as a financial shield during a crisis. It ensures that an illness or accident doesn’t turn into a catastrophe for both your business and your loved ones. As one NZ business article noted, this kind of cover keeps a business stable and ensures continuity, especially for small enterprises​. And if your business stays stable, your personal finances and family’s lifestyle can stay stable too.
Getting Covered: How It Works and What to Expect
So, how do you actually get key person insurance in New Zealand, and what’s involved? Don’t worry – it’s not as daunting as it might sound. Here’s a straightforward rundown of the process and key things to know:
Figure Out Your Needs: First, take a good look at your business and ask, “What costs or losses would need covering if I was out of action?” This includes things like your average monthly revenue, fixed expenses (rent, utilities, phone, insurance, etc.), loan repayments, and any costs to hire a temp. This will help you ballpark how much coverage you might need. Some people aim for enough to cover at least 6–12 months of expenses and lost profit – just to be safe. If you’re not sure, a financial adviser can help you work this out.
Monthly Benefit vs. Lump Sum: Key person policies can be structured in different ways. Some offer a monthly benefit (almost like a short-term income for the business) if you’re temporarily disabled or very sick​. Others offer a lump sum payment, which might apply in cases of death or permanent disability. You can even have a combination: for example, a lump sum if you die, but monthly payments if you’re temporarily unable to work. Decide which makes sense for your situation – many sole traders opt for monthly benefits for illness/injury cover, since that helps with cash flow, and maybe a lump sum component for worst-case (fatal) scenarios.
Application and Medical Checks: Applying for key person cover is similar to applying for life or health insurance. You’ll fill out some forms about your health and lifestyle (and possibly your business finances). Depending on the amount of cover you want, you might need a medical exam or blood test – especially if the policy includes a life insurance component. This is just so the insurer can assess the risk and set a fair premium. Be honest in your application to ensure any future claim is hassle-free.
Cost of Premiums: How much does it cost? The cost of key person insurance varies – it depends on factors like your age, health, the nature of your work (a desk-based web designer might pay less than a forestry contractor, for example), and how much cover you want. To give a rough idea, premiums can range from a few hundred to a few thousand dollars per year​. That might sound like a lot, but broken down monthly it could be anywhere from maybe $30–$250+ per month (again, rough figures). For many sole traders, it ends up being just a small fraction of their business revenue – a worthwhile trade-off for the protection it provides. It’s always a good idea to get quotes from a couple of insurers or through an insurance broker to see what the cost would be for you.
What the Policy Covers (and Doesn’t): Make sure you understand the conditions of your policy. Key person insurance will specify the events that trigger a payout. Typically, that includes death, certain critical illnesses, or a disability that prevents you from working. Check if it covers both accidents and illnesses (most do, if it’s a broad policy). Also note the waiting period – e.g. a policy might start paying a monthly benefit only after you’ve been unable to work for 30 days or 60 days. And there might be a maximum benefit period (for example, it will pay for up to 12 or 24 months of disability). These details affect the premium cost too. An adviser can help customise the policy so it makes sense (you might decide to go with a slightly longer waiting period to reduce premiums, if you have some savings to cover the first month or two of a crisis).
Tax and Structure: In NZ, the way you set up the policy can have tax implications. Generally, if the policy is purely to cover loss of business profits, the premium might not be tax-deductible, but the payout would be tax-free​. (Whereas some insurance, like certain types of income protection, can be tax-deductible). It’s worth discussing this with your adviser or accountant – they’ll ensure you structure it right. The key person policy can be owned by you personally or by a business entity if you have one; for a sole trader it’s usually just in your name with your business as the beneficiary.
Making a Claim: Hopefully you never have to make a claim, but if you do, it usually involves submitting medical evidence (e.g. doctor’s report if you’re ill/injured, or a death certificate in a fatal scenario) to the insurer. They will assess it and then pay out the benefits according to the policy terms. A good adviser will actually help you through the claims process, which can reduce stress at a difficult time. Remember, the payout goes to your business (you), not directly to your family​ – so you or someone you trust will need to handle using those funds in the business. You might use an accountant or family member to help if you’re incapacitated.
Getting key person insurance isn’t a one-click process, but it’s pretty straightforward with guidance. Many financial advisers in NZ specialize in helping small business owners with this kind of cover – and since you’re visiting a financial adviser’s website right now, that help is within reach! Don’t be afraid to ask questions and make sure you fully understand the policy options. It’s your business and livelihood, after all.
Final Thoughts: Peace of Mind for You and Your Business
Running your own business as a sole trader in New Zealand is rewarding, but it also comes with risks that employees in a big firm don’t face. Key person insurance is about managing one of the biggest risks – the “you” risk. It’s making sure that if life throws you a curveball, your business and family won’t take a devastating financial hit.
New Zealand is a nation of small business owners and independent earners, and we Kiwis pride ourselves on our resourcefulness and “number-8 wire” mentality. Taking out insurance might not feel as tangible as, say, buying a new tool for your trade or a new laptop for your home office, but it’s just as important an investment. It’s an investment in continuity – the ability to keep going no matter what.
In the end, having key person cover (alongside things like an emergency fund, ACC CoverPlus if you opt for it, and personal insurances) means you can sleep a bit easier at night. You know that even if you slip off a ladder, fall ill, or worse, your loved ones won’t be left holding a struggling business with no income. Instead, there’s a plan in place and financial support ready to activate when you need it most.
Bottom line: If you’re a sole trader in NZ, consider giving yourself and your business this safety net. It’s like a lifejacket – you hope you’ll never need it, but if you do, you’ll be immensely grateful it’s there. And with a solid plan B in place, you can get on with doing what you do best: running your business with confidence and passion, knowing you’ve got the important bases covered.
Sources: Key person insurance information and statistics were gathered from New Zealand business resources and insurance experts, including business.govt.nz’s guide on insurance​, industry commentary on SME risks covernote.co.nz, and small business data from MBIE (71% of NZ small businesses are sole traders)​ f.hubspotusercontent10.net. These insights underscore how vital it is for sole operators to have a backup plan in place.
