Key Person Insurance: How It Protects Your Business

Business Overhead Expense Insurance vs Key Person Insurance

Key person insurance pays the business when a key person dies. They solve different problems, so the right choice depends on which loss worries you most.

If you are weighing business overhead expense insurance vs key person insurance, this guide compares them side by side. It is written for owners in Florida, including Miami, whose payroll and rent depend on one or two people.

The short answer: what each coverage pays and to whom

Key person insurance pays a lump sum to the business. Overhead expense insurance pays listed bills so the business can keep running during a disability.

The two cover different losses. Key person coverage addresses the loss of someone’s skills, sales or leadership. Overhead expense coverage addresses cash running short while an owner can’t work.

Policy wording controls what gets paid. Compare the contract language, not just the product names. This firm handles key person insurance.

What key person insurance pays, and when

Key person insurance pays a lump sum to the business when the insured key person dies. The business owns the policy and is the beneficiary. The check goes to the company, not directly to the family.

The Insurance Information Institute explains that key person life or disability coverage compensates a business for financial losses caused by a key employee’s death or disability. Examples include an owner, a top sales lead or a senior manager.

Florida adds a consent rule. A business may insure a key employee or key person only if it gets written consent from that person before buying the policy. The business also may not retaliate against a person who refuses consent.

The business decides how to use the money. Common uses include recruiting a replacement, covering training costs or bridging lost revenue. Coverage can be written as term or whole life. Each choice has different features, and the contract spells them out.

Which business bills overhead expense coverage reimburses after a disability

Many policies include a waiting period before benefits begin. The benefit period sets how long payments last. Monthly limits cap what gets paid. All three terms come from the individual contract.

The trigger for key person life coverage is the insured person’s death.

Side-by-side: trigger, payee, timing and what is covered

Key person life pays on death, to the business. Overhead expense pays listed bills on disability. The table below compares business overhead expense insurance vs key person insurance on the main points.

Each figure and limit comes from the individual policy. Check the exclusions and renewal terms in the contract before you decide.

Which loss each one addresses: cash flow versus replacing the person

Key person coverage addresses losing the person. Overhead expense addresses losing cash flow while the owner can’t work. A business may need one, the other, or both.

Start by mapping three exposures. First, what happens to sales or know-how if a key employee dies or becomes disabled? Second, what happens to income if the owner can’t work? Third, which fixed bills, such as rent, loan payments and payroll, must keep going?

Then answer four questions. Who is the key person? Which expenses must continue? How long could the business run without that person? What do existing buy-sell or loan agreements require?

Those answers point toward the right coverage. The right fit depends on the business’s structure, its debts and each person’s role.

Does insurance count as a business expense? How premiums are treated

Federal tax law generally denies a deduction for life insurance premiums when the business is a beneficiary of the policy. See 26 U.S.C. § 264.

Death benefits are generally excluded from gross income. The IRS also notes that interest paid on those proceeds is taxed.

Tax results depend on how the policy is owned and who receives the benefit. Ask how premiums and benefits for each policy are treated before you buy.

NR CPAs & Business Advisors is a CPA firm. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice.

Underwriting and health questions for key person coverage

Key person life insurance is fully underwritten. Health questions are required, and issue may depend on insurability. Disability and overhead coverage also review health and occupation. The policy sets those requirements.

Florida gives life policies some protection after they start. Under Fla. Stat. § 627.455, a life policy becomes incontestable after it has been in force during the insured’s lifetime for 2 years from its date of issue. 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 statute lists exceptions, including nonpayment of premiums.

Incontestability has limits. Under Fla. Stat. § 627.463, the clause does not stop defenses based on policy provisions that exclude or restrict coverage. Read the exclusions carefully.

Premium timing matters too. Under Fla. Stat. § 627.453, every insurance contract must give a grace period of not less than 30 days for paying any premium after the first.

Where to take the next step with this business

If your business depends on one person’s skill, client relationships or signature, the risk is real. Payroll and rent keep coming even if that person dies or cannot work.

The decision in front of you is whether key person life coverage fits that exposure, and at what benefit amount. A coverage review of your key person coverage with our licensed agent can help you test those facts against your own contract. You can reach us through our contact page.

Insurance is offered by Nischay Rawal, a licensed insurance agent in Florida, separately from the accounting practice. Under Fla. Stat. § 626.9531, agents must clearly tell prospective insureds that they act as insurance agents and name the insurers they represent.

Common questions