Can a Sole Proprietor Have Key Person Insurance?

Usually, a sole proprietor cannot have key person insurance the way a company does. The common route is a personal life insurance policy the owner buys on their own life, paired with a written plan for the business. This guide explains why, and what to check before buying. It is written for owners in Florida, including Miami, Orlando, and Tampa, and for owners across the United States, including Indian-American business owners. Insurance is offered by a licensed agent, separately from our accounting practice.

Short Answer: Usually a Personal Policy, Not a Business-Owned One

A sole proprietor generally cannot hold a key person policy the way a corporation or LLC does. The business has no separate legal life from its owner. The practical route is a personal life policy that the owner buys on their own life. The owner names the beneficiary. A written continuation plan then sets out what happens to the business if the owner dies or can’t work. The policy pays the beneficiary the owner names. How those funds get used is a planning decision, and no policy can promise a particular result for the business.

Why a Sole Proprietorship and Its Owner Are One Legal Person

A sole proprietorship is not a separate legal entity. For legal purposes, the owner and the business are the same person. That is why the usual key person setup doesn’t fit cleanly. A key person policy is normally owned by the business, because the business is the one that loses money when a key person dies or becomes disabled. The Insurance Information Institute describes key person life or disability insurance as a way to compensate a business for financial losses caused by a key employee’s death or disability. A one-owner business has no separate employer to hold that role.

The insurable interest question is the next step. Insurable interest means a financial stake in someone’s life that makes buying a policy on it lawful. Under Fla. Stat. § 627.404, any individual of legal capacity may buy an insurance contract on his or her own life. So the real questions are who owns the policy and who receives the benefit. A sole proprietor’s personal policy is a different setup from a business-owned one.

Building a Written Business Continuation Plan Around a Personal Policy

A written continuation plan answers the question of what happens to the business. Start by writing down who would run the business, or wind it down, if you could not work. Then list how client and vendor relationships would be handled. Note which bank accounts, licenses, and contracts are tied to your name. Name who has authority to act and sign for the business. Without these answers, a death benefit alone does not tell anyone what to do.

Next, connect the personal policy to the plan. The beneficiary you name receives the proceeds. The plan is what sets out how those funds could support a wind-down, a sale, or a transition. You remain the policy owner, so you control the policy and the beneficiary designation. Review the plan whenever the business changes. Examples include adding staff, changing how you bill clients, or adding debt tied to the business.

How This Differs From a Company-Owned Key Person Policy

In a company-owned key person policy, the business owns the policy, pays the premiums, and is usually the beneficiary. In a sole proprietorship, you own the personal policy and name the beneficiary yourself. That ownership difference changes who controls the policy and where the benefit goes.

Tax treatment depends on the facts, including how the business is organized and reported. Under 26 U.S.C. § 264(a)(1), premiums are not deductible when the taxpayer is directly or indirectly a beneficiary under the policy. Under 26 U.S.C. § 101(a), amounts paid because of the insured’s death are generally excluded from gross income. Estate inclusion is a separate question. Under IRC § 2042, life insurance proceeds receivable by the executor count in the gross estate, and proceeds receivable by other beneficiaries count when the decedent held any incidents of ownership, meaning control over the policy, at death; a reversionary interest counts only if its value exceeded 5 percent of the policy’s value immediately before death. Owning the policy yourself can therefore affect your estate. We work through these points in a coverage review, with the accounting side kept separate from the insurance.

Checks to Make Before Buying a Personal Policy for Business Purposes

Start with underwriting. A fully underwritten policy asks health questions, and the issue and premium depend on insurability. The NAIC Life Insurance Buyer’s Guide covers term versus permanent coverage, how much to buy, and questions to ask before buying.

Next, decide between term and whole life. Term life covers a set period. Whole life covers the insured for life and builds cash value. The better fit depends on how long you expect the business need to last. If a whole life policy pays dividends, those dividends are not guaranteed. Guaranteed and non-guaranteed values should be shown separately in any illustration you review.

Finally, read the policy after it arrives. The Florida life insurance guide from the Florida Department of Financial Services covers the review period after a policy is delivered. Use that time to check the owner, beneficiary, and face amount against your written plan. If anyone suggests replacing an existing policy, ask how the change affects your coverage.

Next Step: A Coverage Review With Our Team

A coverage review is the place to match a personal policy to your written continuation plan. Nischay Rawal is the licensed insurance agent responsible for this page. Insurance is offered by the licensed agent, separately from our accounting practice. Any compensation the agent receives is disclosed in writing before an engagement. Any fee for the coverage review is explained in full, in writing, before the review begins.

If you run a business alone and would be the only person carrying it, contact our team to set up a coverage review.

Frequently Asked Questions