Protect Your Business and the People Who Keep It Running

A business can own a life insurance policy on a key employee. The company pays the premiums and collects the death benefit if that person dies while the policy is in force. This guide explains the three roles in business owned life insurance key employee coverage, the consent and tax rules a CPA reviews, and what to expect. Insurance is offered by a licensed agent, separately from the firm’s accounting practice.

What Business-Owned Life Insurance on a Key Employee Is

The company applies for the policy, owns it and pays for it. The employee is the insured person. Insurance people often call this key person life insurance.

The Insurance Information Institute says key person life or disability coverage compensates a business for financial losses caused by an employee’s death or disability.

A key employee is someone whose loss would hurt revenue, operations or client relationships. That might be an owner, a top executive, a producer who brings in clients, or a technical leader the firm depends on.

This coverage often fits closely held companies, professional practices and firms where one person carries outsized weight. Many owners start asking questions after a partner’s health scare or a key hire’s departure risk.

It differs from personal coverage. An employee who buys a policy for family names the family as beneficiary. Here, the company is the beneficiary. For the broader picture, see our key person insurance guide.

Who Owns, Pays for and Receives the Policy

In most business-owned cases, the company is the owner, the premium payer and the beneficiary. The employee is only the insured.

Insurable interest is the legal reason the company may buy the policy. The business may not retaliate against someone who says no (Fla. Stat. § 627.404).

That interest does not have to last after the coverage starts. The same statute says the insurable interest need not exist after the inception date of coverage (Fla. Stat. § 627.404).

Premiums usually come from company accounts. Keep records that show which account paid, when, and under which policy.

Owner, payer and beneficiary usually match in business cases. That match keeps the policy’s purpose clear. How the company books premiums depends on the policy and the company’s facts. Our team reviews that treatment with the owner before the first payment.

How Cash Value and the Death Benefit Work

The death benefit is the amount the insurer pays when the insured dies while the policy is in force. The face amount sets the base for that benefit. The policy form sets the terms.

Term life insurance covers a set period and has no cash value. Whole life insurance builds cash value over time, as the policy’s terms describe.

Cash value is a value inside the policy. The owner may reach it through a policy loan or a surrender, and each path has effects. Show guaranteed and non-guaranteed values separately. Any dividends are not guaranteed.

Florida law requires a policy with cash surrender value to provide that, while no premium is in default, the insurer will advance a policy loan using the policy as sole security, though the insurer may delay granting a loan, other than one to pay a premium, for 6 months after you apply. The loan value is at least the cash surrender value at the end of the policy year, after permitted deductions (Fla. Stat. § 627.458). Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” If total debt reaches the loan value, the policy may end, but only after at least 30 days’ notice is mailed. Unpaid loan balances can reduce what the policy pays at death. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.”

Incontestability clauses limit challenges to a policy’s validity after a set period. They do not stop defenses based on exclusions or restrictions (Fla. Stat. § 627.463). Read the exclusions in the policy form.

Cost depends on age, health, policy design and face amount. Our team walks through those factors in a coverage review.

Tax, Employee Consent and Questions a CPA Reviews

Federal tax law sets notice, consent and reporting steps for company-owned policies. It also limits some deductions.

Corporate-owned life insurance, or COLI, is a broad term. It means life insurance a company owns on its employees. Key person coverage is a narrower use of the same idea, aimed at a few key people.

Federal rules for employer-owned policies limit the tax-free death benefit to premiums paid unless the notice and consent requirements of paragraph (4) are met, and those requirements include the employee’s written consent to being insured. The consent must say coverage may continue after employment ends. The employee must also be told in writing that the company will be a beneficiary (IRC § 101).

No deduction is allowed for premiums on a life policy when the taxpayer is directly or indirectly a beneficiary (IRC § 264). This is why the beneficiary choice matters for the tax result.

Owners of employer-owned contracts must file a yearly return. Owners of employer-owned contracts issued after August 17, 2006 must file a yearly return. It shows employee counts, insured counts, total insurance in force, the policyholder’s name, address, taxpayer identification number and type of business, and whether each insured employee gave valid consent (IRC § 6039I).

Tax treatment depends on the facts. Bring the policy, the consent forms and the premium records to a CPA review before the first payment. For how a company plans around its leaders, see key person insurance for management teams.

What to Expect: Steps and Timing

The process moves from a coverage review to underwriting, employee consent, policy delivery and annual review.

1. Coverage review. Define the key employee, the business need and the goal for the policy.
2. Application and underwriting. The insurer asks health questions. Issue may depend on insurability and the insurer’s underwriting.
3. Employee consent. Florida law requires the insured person to apply for or consent in writing on or before the contract is made (Fla. Stat. § 627.404). Get this signed before the policy is issued.
4. Delivery and review. Read the policy form, the guaranteed and non-guaranteed values, the exclusions and the loan terms. Ask questions before you rely on the policy.
5. Annual review. Check premiums, values and the death benefit against the company’s current needs.

Underwriting and paperwork set the pace. After a claim, the company’s use of the proceeds is covered in our key person death benefit guide.

Why Work With NR CPAs & Business Advisors on This Coverage

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals and business owners in Florida choose and buy life insurance. That includes term and whole life, key person and buy-sell coverage. It also includes Indian-American households and business owners.

Insurance is offered by Nischay Rawal, a licensed insurance agent in Florida. This is separate from the firm’s accounting practice. Florida requires an agent to hold a current license and be appointed by an appropriate appointing entity before acting as one (Fla. Stat. § 626.112).

Our team brings a CPA’s view of tax and cash flow to the coverage review. We look at how a policy fits the company’s books and budget.

If the agent earns a commission, the firm discloses that in writing before any engagement, with full details of the compensation. Florida law requires a CPA or CPA firm in public practice that accepts a commission for selling a product or service to a client to disclose that fact to the client in writing, as Board rules require (Fla. Stat. § 473.3205). The firm offers no rebates or inducements with the policy.

Frequently Asked Questions