Insuring a Key Employee? Start With the Consent Question

Do I need employee consent for key person life insurance? In most cases, yes. A business generally needs the employee’s written consent before it can buy coverage on that person. Florida law and federal tax law both set the steps.

The Short Answer: Yes, in Almost Every Case

The business may own the policy and collect the death benefit. But the person being insured still has to agree first.

Florida law is direct. Under Florida law (Fla. Stat. 627.404), an individual of legal capacity may buy coverage on his or her own life for the benefit of any person, but a policy taken out on another individual’s life must pay its benefits to the insured, the insured’s personal representatives, or a person who had an insurable interest in the insured when the contract was made, and the proposed insured’s signature on the application, if he or she has capacity to contract, counts as written consent. For purposes of Florida insurance law, the signature of the proposed insured on the application, if that person has legal capacity to contract, constitutes written consent.

In practice, the consent is built into the application. The insured person signs it and answers the health questions. Fla. Stat. § 627.404 reads: “(5) 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 such contract, the person insured, having legal capacity to contract, applies for or consents in writing to the contract and its terms, except that any person having an insurable interest in the life of a minor younger than 15 years of age or any person upon whom a minor younger than 15 years of age is dependent for support and maintenance may obtain a policy of insurance on the minor.” For the full overview of how this policy type works, read our key person insurance guide.

Why the Insured Person’s Signature and Health Information Matter

The signature proves consent. The health answers help the insurer decide whether to issue the policy.

Some policies are fully underwritten. For those, issue may depend on insurability. The insurer may also ask for more information before it decides.

Insurable interest is the other key idea. In plain words, the business needs a real financial stake in the person’s life. Fla. Stat. § 627.404

The business needs their written consent before the insurance is bought.

Watch the timing. Some owners buy the policy first and ask for the signature later.

Written Notice and Consent Rules for Employer-Owned Life Insurance

Federal tax law adds written steps for employer-owned life insurance on an employee.

1. Notice: The employee is told that the business intends to insure his or her life. The employee also learns the maximum face amount that could be issued.
2. Consent: The employee agrees to being insured. The consent also covers coverage that may continue after employment ends.
3. Beneficiary disclosure: The employee is told that the business will be a beneficiary of any death proceeds.

These steps matter for taxes. The statute’s exceptions for employer-owned contracts apply only when these notice and consent requirements are met.

Businesses also have a yearly filing duty. A business that owns employer-owned contracts must file a return reporting whether valid consent exists for each insured employee. It must also keep records. See 26 U.S.C. § 6039I.

These federal steps are not the only rules. Ask your CPA which exception, if any, fits your facts before you rely on it.

Who Counts as the Key Person and Who Owns the Policy

A key person is an employee whose position or compensation is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code. Key person coverage helps a business cover financial losses if that person dies or becomes disabled, according to the Insurance Information Institute.

Examples include a top sales producer, an owner-operator, or an essential technical leader. Fla. Stat. § 627.404

Usually the business owns the policy and receives the death benefit. The insured person does not own it. That is why the consent steps focus on the person being insured.

A buy-sell policy works differently. It ties to an agreement among owners and funds the purchase of a partner’s share. Key person coverage protects the business from losing an essential person. The two can be used together, but they answer different questions.

Practical Steps Before Applying for Key Person Coverage

Put the written consent in place before the application goes in. Work through these steps in order:

1. Name the key person and state the business’s financial stake in that person.
2. Prepare the written notice. Include the maximum face amount and a statement that the business is the beneficiary.
3. Get the employee’s signed consent. Include consent to coverage that may continue after employment ends.
4. Complete the application, including the health questions.
5. Record the decision in company minutes or a written resolution. Keep copies of the notice and consent with company records.

For buy-sell coverage, each partner should agree in writing to the agreement and to the policy terms tied to it.

Before issue, check the policy owner, the beneficiary, and any transfer provisions. The paperwork should match what the business intends. The NAIC Life Insurance Buyer’s Guide also lists questions to ask before buying life insurance.

Tax and Cash Flow Questions to Settle Before the Policy Is Issued

Premiums and death benefits can each raise tax questions. Review them with a CPA before the policy is issued.

Federal law generally excludes death benefits from gross income. Florida law bars procuring insurance on another person’s life unless the benefits are payable to the insured or his or her personal representatives, or to a person who had an insurable interest in the insured when the contract was made. The transfer-for-value exception is a federal rule in 26 U.S.C. § 101. Interest paid on proceeds left with the insurer is taxable. See 26 U.S.C. § 101.

Premiums are a steady cost. Plan for them alongside payroll and loan payments, so the cash flow works before the first bill arrives.

NR CPAs & Business Advisors is a Miami CPA firm. Insurance is offered by the licensed agent, separately from the accounting practice. If a CPA firm accepts a commission for selling a product to a client, Florida law requires written disclosure. See Fla. Stat. § 473.3205.

Talk Through Your Situation in a Coverage Review

Yes, the consent steps should be settled before you apply. The questions below cover the most common points.

Frequently Asked Questions