Two of your clients, Peter Hampton (36 years old) and Sarah Talbot (43 years old), run a very successful optometry franchise under a company structure. Sarah is a qualified optician, and undertakes all client consultations and eye tests. Peter is an optical technician, producing lenses for spectacles, undertaking repairs and adjustments for spectacles, and ensuring that customers glasses are fitted properly. The business operates on an ongoing overdraft of $200,000, while Peter and Sarah have taken out loans to purchase the business when they acquired the franchise 3 years ago. While Peter and Sarah are business partners, each is married to a spouse who is not involved in the business. Sarah and Peter have asked you about an article that they came across in an optometry journal about the importance of franchisees considering the need for key person insurance. They have estimated that if Sarah were to pass away or be unable to work then following expenses would be incurred: Recruitment and training of replacement - $ 150,000 Revenue reduction over first year - $450,000 Required:

Explain how the key person insurance would work for Peter and Sarah in their business. Calculate the amount of covers needed, explaining how you determined them and discuss the effect of taxation on any claims.