Protect the Business Your Team Depends On

This guide explains how to apply for key person life insurance, how medical underwriting works, and which documents to gather first. For more background, read our key person insurance guide. NR CPAs & Business Advisors is a Miami CPA firm. Insurance is offered through a licensed insurance agent, separately from the accounting practice.

What are the steps to apply for key person life insurance, including medical underwriting and required documents?

To apply for key person life insurance, the business applies as owner and beneficiary. The key person gives written consent and answers health questions. The insurer then decides whether and how to issue the policy. Here is the usual sequence.

1. Confirm the insurable interest. Under Florida law, a business entity has an insurable interest in the life of its owners, directors, officers, partners, managers, key employees, or key persons, as the Internal Revenue Code defines those terms, but only if that person consents in writing before the insurance is purchased (Fla. Stat. § 627.404). An insurable interest is a real stake in the insured’s life, body, or health.
2. Gather documents. Collect the items listed in the documents section below.
3. Complete the application. Answer every health question fully. Health questions are required on this coverage.
4. Answer underwriting requests. The insurer may ask for an exam, lab work, or medical records. Issue may depend on insurability.
5. Receive the decision and policy. The policy comes with a review period. Read the policy during that window.

Each insurer uses its own form, so exact steps and timing will vary.

Who Is the Owner and Who Is the Beneficiary on a Key Person Life Insurance Policy?

In a standard key person arrangement, the business is the owner and beneficiary. The key person is the insured. The owner usually pays the premiums. The beneficiary receives the death benefit. The insured is the person whose life is covered.

The application names each role, so the insurer knows who pays, who receives the proceeds, and whose life is insured. These choices also shape taxes. Federal law generally denies a deduction for premiums when the taxpayer is a beneficiary under the policy (26 U.S.C. § 264).

Check the roles against your governing documents and any buy-sell agreement before you sign. A mismatch between the policy and those documents is easy to miss and hard to fix later.

Which Documents Do You Need to Gather Before Applying?

You’ll usually need the key person’s identity details, the business’s formation papers, proof of the person’s role, and recent business financial statements. The insurer sets its own list, so expect follow-up requests.

• Identity details. Full legal name, date of birth, and contact information for the key person.
• Entity documents. Papers showing the business’s name and ownership.
• Role support. Proof of the person’s position and why the business depends on it.
• Financial information. Recent statements or tax information that supports the amount requested.

For some employer-owned policies, federal law requires an annual return showing, among other facts, whether the policyholder has a valid consent for each insured employee (or how many insured employees lack one) (26 U.S.C. § 6039I). Keep consent forms in one organized file. Ask the insurer what medical authorization it needs for the key person’s records.

How Does Medical Underwriting Work in a Key Person Application?

Medical underwriting is the insurer’s review of the insured’s health. It decides whether to issue the policy and on what terms. Health questions are part of the application. The insurer may also request an exam, lab work, or records.

Answer every question with complete, accurate facts. Incomplete answers can delay the decision or affect issue. Florida law makes a policy incontestable after it has been in force during the insured’s lifetime for two years from its date of issue (Fla. Stat. § 627.455). Fla. Stat. § 627.455 reads: “Every insurance contract shall provide that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue except for nonpayment of premiums and except, at the option of the insurer, as to provisions relative to benefits in event of disability and as to provisions which grant additional insurance specifically against death by accident or accidental means.” The exceptions include nonpayment of premiums and certain listed provisions.

Some policies pay graded or limited benefits in early years. Read the insurer’s form for those terms before you accept the policy.

How Much Coverage Should a Business Apply For?

The coverage amount usually reflects what the key person’s loss would cost the business. The Insurance Information Institute says key person coverage compensates a business for financial losses caused by an employee’s death or disability. Businesses often weigh lost profits, the cost of replacing the role, and any debts or buy-sell obligations.

The insurer may review financial statements to see whether the requested amount fits the business. Tie the amount to a real purpose, such as a buy-sell funding need or a loan, rather than a round number.

Premium and policy terms come from the insurer’s own form. Fees and compensation are disclosed in writing in an engagement letter before any engagement begins.

What Tax and Cash Flow Questions Should Be Reviewed Before Signing?

Tax treatment turns on who owns the policy and who receives the benefit. Review it before you sign. The key point is the premium deduction. Federal law allows no deduction for premiums when the taxpayer is directly or indirectly a beneficiary under the policy (26 U.S.C. § 264). A business that is the beneficiary should not plan on deducting premiums.

Cash flow questions come next. Ask who will pay premiums, whether the business can carry them over the long term, and how the proceeds would be used if the key person died. Those answers shape the coverage amount and the policy structure.

Insurance is offered through the licensed agent, separately from the accounting practice. Tax results depend on the facts of each business.

What Happens After You Submit the Application, and How Can You Take the Next Step?

After you submit, the insurer may send follow-up requests. Then it decides issue, delivers the policy, and the review period begins. Florida’s consumer life insurance guide explains these basics, including the review period.

Nischay Rawal is the licensed insurance agent on this page. Florida law says no one may act as an insurance agent unless licensed and appointed (Fla. Stat. § 626.112). Fla. Stat. § 626.112 reads: “(1)(a) No person may be, act as, or advertise or hold himself or herself out to be an insurance agent, insurance adjuster, or customer representative unless he or she is currently licensed by the department and appointed by an appropriate appointing entity or person.” When soliciting or selling insurance products, an agent must clearly indicate to prospective insureds that they are acting as insurance agents for the identified insurers they represent (Fla. Stat. § 626.9531).

Frequently asked questions