Do I Need Consent to Insure an Employee's Life?

Yes. If your business wants to own a life insurance policy on a key employee, the employee must get written notice and must consent in writing before the policy is issued. Federal tax law and Florida insurance law both set these steps. This page explains what each step means and when it applies.

What Employee Consent Means for a Business-Owned Life Policy

Consent means the employee provides written consent to being insured under a policy the business owns, and that such coverage may continue after the employee leaves the job. This is most often called key person insurance. Key person life insurance is a policy the business owns and pays for. It insures a key employee whose death would cause the company financial harm. The Insurance Information Institute explains that this coverage compensates a business for losses caused by a key employee’s death or disability.

This is different from a policy the employee buys for their own family. It is also different from a group benefit plan at work. In a personal policy, the insured owns the contract. In key person coverage, the business owns it and collects the death benefit.

NR CPAs & Business Advisors is a Miami CPA firm. Insurance is offered by our licensed agent, Nischay Rawal, separately from the accounting practice. Our team looks at the tax and cash flow side of these decisions alongside the coverage itself.

Why the Federal Notice-and-Consent Rule Applies

Federal tax law sets notice and consent rules for employer-owned life insurance. If the business misses these steps, the tax treatment of the death benefit can change. That makes the steps a cash flow issue, not just paperwork.

The rule sits in IRC § 101. It says the notice and consent requirements are met only if certain written steps happen before the contract is issued.

The IRS explains that life insurance death benefits are generally excluded from gross income. You can read that point in the IRS life insurance proceeds FAQ. For an employer-owned contract, the death benefit is excluded from the policyholder’s gross income only up to the sum of the premiums and other amounts the policyholder paid for the contract, unless the notice and consent requirements are met and one of the exceptions in IRC § 101(j)(2) applies.

Tax questions and insurable interest questions can each call for separate review. A policy can meet one and still fail the other. Florida’s rule on insurable interest is covered below.

Step-by-Step: Giving the Employee Written Notice Before Applying

The business must tell the employee in writing that it intends to insure the employee’s life. The notice must also state the maximum face amount for which the employee could be insured at the time the contract was issued. The face amount is the death benefit the policy would pay.

Timing matters. The notice must come before the policy is issued. Many businesses send the notice at the same time as the application. That works only if the notice is in the employee’s hands before issue. Section 6039I requires records showing whether the requirements of this section and section 101(j) are met; the notice-and-consent timing rule is in section 101(j), so sending the notice after the policy is in force does not satisfy that rule.

Keep a dated copy of the notice in the company’s file. The employee should sign or acknowledge receipt. A clear record shows the steps were done in order. Your CPA can help you set up that file.

Don’t rely on a verbal conversation. A short memo or form, dated and kept on file, is far easier to defend than a memory of a meeting.

Written Consent: What the Employee Signs and When

The employee must consent in writing to being insured under the contract. The consent must also say that coverage may continue after the employee leaves the company. The employee must be told in writing that the business will be a beneficiary of any proceeds paid at death.

Florida adds a parallel rule. The same statute says a contract of insurance on 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 the contract, the person insured, having legal capacity to contract, applies for or consents in writing to the contract and its terms (with an exception for a minor younger than 15: a person having an insurable interest in the minor, or a person upon whom the minor is dependent for support and maintenance, may obtain a policy of insurance on the minor).

A consent signed after the policy is issued does not count. Get the signature before issue, and give the employee a copy of what they signed.

The consent form should match the notice. Same dates, same face amount, same description of the policy. A mismatch between the documents can cause problems later.

Who Must Sign and When Consent Applies

The federal rule has a few narrow exceptions. They are tied to the insured’s role in the business and to how the proceeds are used. The statute text covers situations such as an insured who is a director, officer or employee of the taxpayer, and it has other limited carve-outs.

Don’t assume an exception applies because the employee is important. The facts of the employee’s role and the policy’s terms decide whether one fits. A coverage review can check those facts against the statute before you apply.

Whether any exception applies depends on the facts of each case. Complete them in full before the policy is issued.

Florida law also protects the employee’s choice. Under Fla. Stat. § 627.404, the business may not retaliate against a key employee who refuses to consent. That protection matters for Florida employers in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa and Jacksonville. A refusal cannot cost the employee their job or pay as punishment.

Insurability: Health Questions, Underwriting and What the Employee Must Disclose

Key person life insurance is individually underwritten. The insurer reviews the insured’s health history. Health questions are required, and issue may depend on insurability.

This is a major difference from group life insurance. Group coverage is usually offered to a class of employees under one master contract. Individual key person coverage is different. The employee’s own answers and medical history drive the decision.

The employee’s written consent does not replace underwriting. The insurer still reviews the application and decides whether to issue the policy and on what terms.

Answers must be complete and accurate. Incomplete or wrong answers can affect the policy. The business should not coach the employee on how to answer. The employee should answer for themselves, with care.

Ongoing Reporting, Records and Florida Considerations

Businesses that own employer-owned life insurance contracts issued after the date of enactment of this section (August 17, 2006) must file a return with the IRS each year. IRC § 6039I requires the return to show, among other facts, whether the business has valid consent for each insured employee. If consent is missing for any employee, the return must show how many lack it.

The same section requires the business to keep records needed to show the notice and consent rules were met. Keep the notice, the consent, the application, the policy and the signing dates together in one file.

Florida has its own insurable interest rule, covered above. Under the Florida statute, the insurable interest need not exist after the policy’s start date. The consent and insurable interest must be in place when the contract is made.

Florida insurance agents must be licensed and appointed. Under Fla. Stat. § 626.112, no one may act as or hold themselves out as an insurance agent unless licensed and appointed. Fla. Stat. § 626.112 reads: “(1)(a) No person may be, act as, or advertise or hold himself or herself out to be an insurance agent, insurance adjuster, or customer representative unless he or she is currently licensed by the department and appointed by an appropriate appointing entity or person.” Ask to see that licensing when you work with any agent.

Frequently asked questions

Bringing Your Key Employee Situation to a Coverage Review

A coverage review is our first meeting on a case like this. It is where we look at your facts against the steps above. Many owners reach this point when a key employee’s sudden death would disrupt revenue or client relationships, and they are weighing a policy on that person.

In a coverage review, we look at the company’s reason for the policy, the employee’s role, the face amount, the notice and consent steps, and the tax view from the CPA side. Our key person insurance guide covers the wider planning picture for these decisions.

If your business is considering a policy on a key employee, contact NR CPAs & Business Advisors to set up a coverage review. Insurance is offered by our licensed agent, Nischay Rawal, separately from the accounting practice.