Can a Business Transfer Its Key Person Policy to an Owner?

Short Answer: Can a Business Transfer Its Key Person Policy to an Owner?

Yes, a business can often transfer ownership of a key person policy to an owner. The move changes who controls the policy, and it can change how part of the payout is taxed. The answer depends on the facts: who receives the policy, why it is moving, and whether the policy has cash value.

A key person policy is life insurance a business buys on a key employee or owner. The business usually pays the premiums, owns the policy, and is the beneficiary. The Insurance Information Institute explains that this coverage compensates a business for financial losses caused by the death or disability of a key employee.

This page covers the roles in the policy, why transfers happen, the transfer-for-value rule, tax effects, and the steps to take before a change. It is written for owners, partners, and family members who are sorting this out for a business.

How a Key Person Policy Is Structured: Owner, Insured and Beneficiary

A key person policy has three roles. The owner controls the policy, the insured is the person whose life is covered, and the beneficiary receives the death benefit. In a typical setup, the business is both owner and beneficiary, and the key employee is the insured.

Florida law sets rules for this arrangement. A business entity can have an insurable interest in the life of the owners, directors, officers, partners, or managers of the business entity or any affiliate or subsidiary, or in its key employees or key persons, if those people give written consent before the insurance is bought. The business may not retaliate against someone who refuses consent. Fla. Stat. § 627.404 requires that benefits on another person’s life be payable to the insured or his or her personal representatives, or to any person having, at the time such contract was made, an insurable interest in the individual insured.

Changing any role can change the policy’s purpose and its tax treatment. After a change, the policy may serve a different job. Under Fla. Stat. § 627.404, the insurable interest need not exist after the inception date of coverage under the contract, so the coverage question is measured at inception. For the basics, see our key person life insurance guide.

Why Businesses Move a Key Person Policy to Someone Else

Most transfers happen when the insured’s role in the business ends or changes. The three common triggers are a key employee leaving, an owner retiring, and a buy-sell agreement that requires an ownership change.

Once the insured no longer works for the business, the policy’s original purpose may no longer fit. The company may no longer need protection against that person’s loss. The policy may still matter to the insured or to family members, especially if it has built cash value. That is why the question of who keeps the policy comes up.

A common mistake is assuming the policy goes with the person automatically. It does not. The current owner decides what happens next, and the insurer must process any change. Another mistake is paying premiums for years without a review. A business should decide on purpose and cash flow first.

The Transfer-for-Value Rule Under IRC Section 101(a)(2)

When a life insurance policy is transferred for something of value, the income-tax exclusion that normally applies to the death benefit can be limited. Under IRC § 101, the excluded amount is capped at the actual value given for the policy plus later premiums and amounts the new owner pays, but that cap does not apply in the case of such a transfer as the statute specifies. That cap can make part of the payout taxable income.

The statute also lists exceptions. Some transfers fall within them, and others do not. The statute’s own text decides whether a given transfer is covered.

A transfer for no payment is a different fact pattern. The amount paid, if any, is the key number, so the facts of each transfer matter.

Before the transfer is final, the business and the recipient should confirm which exception applies, if any. Write that conclusion down and keep it with the policy file.

Tax Consequences of the Transfer and of Premiums

For the business, the main questions are deductibility, the transfer-for-value limit, and cash value. Each one turns on the policy’s own terms and values. A transfer can also create taxable income for the recipient.

Federal law bars deductions for interest on loans tied to certain life insurance policies. A business that borrows against a key person policy should review this with its tax adviser.

Cash value raises a separate issue.

Gifts add another layer. The IRS gift tax FAQs list the 2026 gift tax annual exclusion at $19,000 per donee. Under 26 C.F.R. § 25.2512-6, a gifted policy’s value is established through the company’s sale of the contract or comparable contracts; where that is not readily ascertainable because the contract has been in force for some time and further premiums are to be paid, the value may be approximated from the interpolated terminal reserve plus the proportionate part of the premium last paid, but this method may not be used if, because of the unusual nature of the contract, such approximation is not reasonably close to the full value.

Transferring the Policy to the Insured Employee

A business can transfer a policy to the insured employee. This is a common route when a key employee leaves.

The insured usually takes over the premium payments, the beneficiary choice, and the policy’s ongoing terms. Those costs and decisions shift to a person, so the insured should understand them before signing. The business still needs to decide whether to transfer, surrender, or keep the policy. Each choice has its own tax and cash-flow effect.

Florida law generally requires the insured’s written consent. Under Fla. Stat. § 627.404, a contract of insurance upon a person, other than a policy of prepaid funeral contract, group life insurance, or group or blanket accident, health, or disability insurance, may not be carried out unless, on or before the time of entering into it, the insured, having legal capacity to contract, applies for or consents in writing to the contract and its terms. The statute lists some exceptions. Keep signed consents in the file.

The insurer’s change-of-ownership form is usually part of the process.

Transferring Ownership Under a Buy-Sell or Ownership Change

A buy-sell agreement can say who keeps a key person policy when an owner leaves, retires, or dies. The agreement and the policy’s owner should match. Otherwise, the buyout terms and the policy may point in different directions.

The two common structures differ on ownership. In an entity purchase, the company owns the policy and uses the proceeds to fund the buyout. In a cross-purchase arrangement, each owner buys policies on the others and owns them personally. The owner named on the policy changes with the structure the business chooses.

In Florida, a shareholder agreement is effective among shareholders when it complies with Fla. Stat. § 607.0732.

Contract terms also need to be clear. The Florida Supreme Court held in St. Joe Corp. v. McIver that even an oral contract needs offer, acceptance, consideration, and sufficiently specific essential terms. Transfers between owners may fall within an exception, and the facts decide that.

Practical Steps Before Any Ownership Change

Gather the current policy, the ownership and beneficiary records, any buy-sell agreement, and the policy’s current cash value and loan balance before anything moves. These records show what the change would affect.

Next, request the insurer’s change-of-ownership and beneficiary forms. The insurer must process the change, so allow time for its process. Write down the transfer’s valuation, the premium plan after the change, and the effective date. Written records help the business, the recipient, and any tax adviser work from the same facts.

If the policy has cash value, a policy loan may come into play. Under Fla. Stat. § 627.458, a policy loan is available after the policy has a cash surrender value and no premium is in default, but the policy may reserve to the insurer the right to defer granting a loan, other than for payment of a premium to the insurer, for 6 months after application. That section does not apply to term policies or term riders.

The business’s attorney and tax adviser should also review the transfer.

What Happens If the Policy Is Not Transferred

If the business keeps the policy, it can keep paying premiums, change the policy’s purpose, or surrender it for cash value. Letting the policy lapse ends the coverage. Each path has its own result.

A surrender can carry tax results and the loss of any death benefit. Under Fla. Stat. § 627.4553, an agent who recommends surrendering a life policy with cash value, without recommending that the proceeds fund another policy, must give written information first. That information includes estimated surrender charges, possible tax consequences, and any forfeited death benefit.

The business should weigh each path against its current cash flow before it acts.

Key Takeaways

• A key person policy can often change owners. The transfer-for-value rule and its exceptions under IRC § 101 shape much of the tax result.
• Premium treatment, cash value, and beneficiary designations can all change when ownership changes.
• Documents, the insurer’s forms, and any buy-sell agreement should match before a transfer is final.

Frequently asked questions

How NR CPAs & Business Advisors Can Help With a Transfer Review

NR CPAs & Business Advisors is a Miami CPA firm. Nischay Rawal, acting as a licensed insurance agent, offers insurance separately from the accounting practice. Our team reviews key person policy ownership, beneficiaries, and buy-sell terms together.

A coverage review is the first meeting. We look at the existing policy, who owns it, who the beneficiary is, and what the buy-sell terms say. We discuss fees with you before any work begins.

If a key employee is leaving, or an owner is stepping back, and no one is sure who should hold the policy, reach out to us at nrcpas.com/contact to set up a coverage review.