Key Person Coverage: Know Which Documents Insurers Ask For

If you’re asking what documents insurers ask for key person coverage, the short answer is a set of business and ownership records, a description of the key person’s role and pay, and the health questions on the application. Each item has a plain purpose. Gathering them early can make the first meeting easier to follow. This page walks through each item in order. For the full overview, read our key person insurance guide.

How Key Person Coverage Works and Who Applies for It

Key person insurance is a life insurance policy that a business owns on a person whose work or leadership it depends on. The Insurance Information Institute explains that this coverage compensates a business for financial losses caused by a key employee’s death or disability.

In a typical policy, the business is the applicant and owner. The business is also the beneficiary. The key person is the insured. That means the company, not the individual, receives the benefit.

Insurers want to see that the business has a real financial stake in that person’s continued work. Florida law calls this an insurable interest. A business entity may have an insurable interest in the life of its owners, directors, officers, partners, managers, and key employees or key persons, but written consent must be obtained from the key employees or persons before the insurance is purchased. The business must get written consent from those people before the insurance is bought.

The same subsection ties the insurable interest to written consent from the key employees or persons, obtained before the insurance is purchased. The insurable interest is checked at the start, which is why the application file matters so much.

Business Financial Statements and Tax Returns

Insurers commonly ask for recent financial statements and the business’s tax returns. These records show the company’s size and how much of its revenue depends on the key person. Financial statements summarize income, expenses and assets. Tax returns show what the business reported to the IRS.

Together, these papers help the insurer see the scale of the business. They also help show how much the business relies on one leader. Send the most recent versions your team already prepares. You don’t need to create new reports for the application.

Our firm is a CPA firm. Its accounting practice is separate from the insurance. Insurance is offered by the licensed insurance agent, separately from the accounting practice.

Tax treatment of the policy is a separate question. Under IRC § 6039I(a), a policyholder that owns one or more employer-owned life insurance contracts issued after the date of the enactment of this section must file a return each year. That return reports the number of employees, the number insured, the total amount of insurance in force, the policyholder’s name, address, taxpayer identification number and type of business, and whether the policyholder has valid consent for each insured employee. How these rules apply depends on the facts.

Ownership Records and Formation Documents

Insurers usually ask for documents that show who owns the business and who can act for it. Common items include formation papers, the operating agreement or bylaws, and a current list of owners with their ownership percentages.

For an LLC, the articles of organization set out the company’s name, principal office and registered agent. Under Fla. Stat. § 605.0201(2), those articles must include these basic items. The operating agreement matters too. Under Fla. Stat. § 605.0105(1), except as otherwise provided in subsections (3) and (4), the operating agreement governs relations among the members and between the members and the company.

Ownership percentages tie back to the policy roles. The insurer needs to know who owns the company, who applies for the policy and who receives the benefit. For a company with several owners, the setup gets more detailed. Our multi-owner LLC key person guide covers those details.

A buy-sell agreement is a separate document. If one exists, the insurer may ask for it. A buy-sell agreement sets terms for an owner’s exit. It is not the same as a key person policy, so keep it in its own folder.

Describing the Key Person’s Role and Compensation

Insurers commonly ask for a written description of the key person’s position, duties and years with the business. This helps the insurer understand what the company would lose if that person could no longer work.

Compensation records show the person’s income from the business. These may include salary, bonuses or owner distributions. Keep the figures consistent with the financial statements and tax returns in the file. Matching numbers make the file easier to read.

Describe the financial impact in plain terms. Which revenue depends on this person? Which clients, projects or relationships would be affected? Who would need hiring or training? Write facts, with dates, rather than guesses. The goal is clarity. A short, factual list works better than dramatic language.

Health Questions and Medical History

Health questions are required on a key person application, and issue may depend on insurability. Insurers use the answers when they decide whether to issue the policy and on what terms.

The questions generally cover the insured’s medical history, current conditions, medications and recent treatment. Answers must be complete and accurate. Under Fla. Stat. § 627.404(3), an insurer may rely on the applicant’s statements about insurable interest, and, except as set forth in the policy, it is not liable for untrue statements it relies on in good faith.

Florida also limits how long a life policy can be challenged. Under Fla. Stat. § 627.455, every insurance contract must provide that the policy becomes incontestable after it has been in force during the insured’s lifetime for two years from its date of issue. Under Fla. Stat. § 627.455, every insurance contract must provide that the policy becomes incontestable after it has been in force during the insured’s lifetime for 2 years from its date of issue, except for nonpayment of premiums, and except, at the insurer’s option, as to provisions relating to benefits in the event of disability and provisions granting additional insurance specifically against death by accident or accidental means. Accurate answers at the start protect everyone in the file.

Do not assume the health section can be skipped. Pull the insured’s own records and answer each question as written.

The Application, Consent and Policy Form

The insured’s written consent is required before the policy is carried out. Under Fla. Stat. § 627.404(5), the insured, having legal capacity, must apply for or consent in writing to the contract and its terms on or before it is made. Under Fla. Stat. § 627.404, a contract of insurance upon a person, other than a 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, except that a person having an insurable interest in the life of a minor younger than 15 years of age, or a person upon whom such a minor is dependent for support and maintenance, may obtain a policy of insurance on the minor.

Read the insurer’s application form before signing. Note the policy form number on the proposed policy. That number identifies the exact contract being considered.

Know whether the proposal is whole life insurance or term life insurance. A whole life insurance policy shows guaranteed values and non-guaranteed values. Ask the agent to show each one separately. Non-guaranteed values can change, so they should never be read as promised amounts.

Organizing the File for a Coverage Review

Knowing what documents insurers ask for key person coverage makes the first meeting more useful. Gather these items before you talk with an agent:

• Recent financial statements and business tax returns
• Formation papers, operating agreement or bylaws
• A current ownership list with percentages
• Any buy-sell agreement that exists
• A dated description of the key person’s role and years with the business
• Compensation records for that person
• The insured’s health history, in the insured’s own words

A coverage review is the first meeting with the licensed agent. Nischay Rawal acts as a licensed insurance agent in this review. Under Fla. Stat. § 626.112(1)(a), only a person currently licensed and appointed may act as an insurance agent. Under Fla. Stat. § 626.112, a person may not act as, advertise as, or hold himself or herself out as an insurance agent, insurance adjuster, or customer representative unless currently licensed by the department and appointed by an appropriate appointing entity or person, and under Fla. Stat. § 626.9531(1), when soliciting or selling insurance products, agents must clearly indicate to prospective insureds that they are acting as insurance agents with regard to insurance products and identified insurers, or other risk bearing entities authorized and approved to do business in Florida. The accounting practice is separate.

Frequently Asked Questions