Leaving a Company? Understand Key Person Life Insurance Before You Buy

Can you buy key person life insurance policy when leaving company? Sometimes, yes. A departing employee may be able to buy the policy the company holds on their life, but only if the policy allows a transfer and the company agrees to sell it. Both sides also need to review the price and the tax effects first. If the policy can’t move, the employee can apply for a new one instead. This page walks through each path. NR CPAs & Business Advisors is a Miami CPA firm that helps individuals and business owners review these decisions with a CPA’s view of tax and cash flow.

What key person life insurance is and why the question comes up

Key person life insurance is a policy a business owns on the life of an employee whose death would cost the company money. The Insurance Information Institute guide explains that this coverage compensates a business for financial losses caused by a key employee’s death or disability.

Companies buy it to help replace lost income, cover the cost of finding and training a successor, or meet debts that a key person’s death could leave unpaid. The business is the owner and beneficiary. It is a life insurance policy, not a savings plan or investment.

The question usually comes up at departure. The company owns the policy, but the employee is the insured. When employment ends, the policy still sits on that person’s life, so someone must decide what happens to it. For the full overview, see our key person insurance guide.

Can the departing employee buy the policy the company holds on them?

Sometimes. An employee can buy the policy only when the policy allows a transfer and the company, as owner, agrees to sell it. The company decides whether to transfer, keep or surrender the policy.

If you’re asking whether you can buy key person life insurance policy when leaving company, start with the policy documents. Look for the owner, the insured, the beneficiary and any transfer terms. A buyout is a separate agreement. Put the price, the payment date and the transfer date in writing before the last day of work.

Florida law also matters. Under Fla. Stat. § 627.404, a business may insure a key employee only with that employee’s written consent, given before the insurance is bought. The business may not retaliate against someone who refuses. The statute also says the insurable interest need not still exist after coverage starts.

How the transfer price is set

The price is set by agreement between the company and the employee. It is often based on the policy’s cash surrender value. That is the amount the insurer would pay if the owner surrendered the policy for cash, after any charges.

That amount varies with the policy’s terms, the insured’s age, how long the policy has been in force, and the insurer. Policy illustrations show guaranteed and non-guaranteed values separately. Guaranteed values are promised by the contract. Non-guaranteed values are not promised, so read which figure a statement uses.

The agreed price may differ from a number on a policy statement. Before signing, get any surrender charge in writing. Florida law requires an agent who recommends surrendering a policy with cash value, and does not recommend that the proceeds be used to fund or purchase another annuity or life insurance policy, to first give written information. That information includes the estimated surrender charge and possible tax consequences, under Fla. Stat. § 627.4553.

Tax points to review before a transfer

A transfer can change how the death benefit is taxed, so review it before anyone signs. Under 26 U.S.C. § 101(a), amounts received under a life insurance contract because of death are generally not included in gross income. The statute lists exceptions.

Section 101(a)(2) covers a transfer for valuable consideration. This is the transfer-for-value rule in plain words: a policy sold for money can lose some of its income-tax exclusion.

The statute also defines a “reportable policy sale” as acquiring a policy interest when the buyer has no substantial family, business, or financial relationship with the insured. Employer-owned policies have their own rules under section 101(j). The employer may also have filing duties under 26 U.S.C. § 6039I.

If the former employee keeps ownership rights at death, the proceeds may count in the taxable estate. See 26 U.S.C. § 2042. Our CPA review covers tax and cash flow alongside the insurance decision, and we invite you to contact our team to discuss the transfer before anyone signs.

What happens to coverage when employment ends

Coverage stays in force only while premiums are paid. If the company stops paying after the employee leaves, the policy can lapse. Florida law requires every insurance contract to allow a grace period of at least 30 days for any premium after the first. The insurer may charge interest on a late premium of no more than 8 percent per year, under Fla. Stat. § 627.453.

Before the end date, confirm four things. Who owns the policy? Who pays the premiums? Who receives notices? Will the transfer or a new policy be in force before the old coverage ends? Plan the timing around the last day of employment so there is no gap.

If the policy cannot be transferred: applying for a new policy

If the company won’t transfer the policy, a former employee can apply for a new individual policy. A new policy is a separate application. The insurer underwrites it on the applicant’s own health and age at the time of application.

Health questions are required for fully underwritten policies, and issue may depend on insurability. Term life covers a set period. Whole life covers the insured for life while premiums are paid and builds cash value, but its non-guaranteed values are not promised.

If a new application is declined, review the steps in what to review if a key person policy is declined.

Who can own a policy on a life: insurable interest in plain words

Insurable interest is the legal requirement that the buyer have a real financial or family stake in the insured’s life.

Take a son who asks about a policy on his father. The answer turns on the relationship, the purpose and the insurer’s rules. Underwriting applies to the insured, whoever pays the premium.

Replacement, comparisons and the policy’s own terms

Replacing one policy with another is a separate decision. It can bring surrender charges, a new underwriting process and the loss of some benefits. Under 26 U.S.C. § 1035(a), no gain or loss is recognized when one life insurance contract is exchanged for another. That tax point does not decide whether the swap makes sense for you.

Compare policies on the same features: death benefit, premium, cash value, exclusions, renewability, cancellability and any age-based change. Don’t compare on a single number. The NAIC Life Insurance Buyer’s Guide covers term versus permanent coverage, comparing policy costs, and questions to ask before buying.

Bringing your situation to a coverage review

If you’re leaving a job, facing a layoff, or helping a family member sort out a policy on their life, the company’s coverage may be a live question now. A coverage review is where we go through the policy documents, the transfer terms and the new-policy options with you.

Nischay Rawal is a licensed insurance agent with NR CPAs & Business Advisors. Insurance is offered by the licensed agent, separately from the accounting practice. Any specific policy we discuss will be named with its insurer. If the agent is paid a commission on a policy, that compensation is disclosed in writing before any engagement. Our fees for accounting and insurance work are also disclosed in writing before we begin.

Can you buy key person life insurance policy when leaving company without the company’s agreement?

If the policy on your life is part of a job change you didn’t plan, reach out through our contact page to set up a coverage review with our licensed agent.