Protect your business and the people who depend on it

Does key person life insurance require a medical exam? Often, yes, but not always. A medical exam is common with fully underwritten key person coverage. Whether one is needed depends on the insurer, the key employee’s age, the coverage amount, and health history. Every application includes health questions, and issue may depend on insurability.

This guide explains what underwriting looks at, why the employee signs first, and how policy type can change the process. NR CPAs & Business Advisors helps business owners and families review life insurance options, including key person coverage.

Short Answer: Does Key Person Life Insurance Require a Medical Exam?

A medical exam is often part of fully underwritten key person life insurance, but the insurer decides what it needs for each applicant. Key person life insurance is coverage a business buys on an important employee, such as a manager or executive whose loss would hurt the company’s income. The business owns the policy, pays the premiums, and receives the death benefit. For how this coverage is structured, read our key person insurance guide.

How Key Person Life Insurance Works Before Underwriting Begins

The business applies for the policy, and the key employee is the insured person. That is why the underwriter studies the employee’s health, not the owner’s. A common mistake is assuming the owner’s health drives the decision. It usually does not.

Florida law lets a business insure certain people tied to it, including key employees and key persons. It defines a key employee by the federal tax definition. The business must also get written consent from those people before the insurance is bought. See Fla. Stat. § 627.404.

Insurable interest is a plain idea. The buyer needs a real, legal reason to insure the person. For a business, that reason is usually the financial harm it would face if a valuable employee died. The Insurance Information Institute explains how key person coverage is valued and purchased.

What Underwriting Asks on the Application

The application asks about the insured employee’s health and lifestyle. Typical questions cover medical history, current conditions, medications, tobacco use, height and weight, hazardous activities, and travel. Each insurer sets its own questions. It weighs the answers against the coverage amount and the policy type requested.

Accurate answers matter. Florida law makes a life insurance contract incontestable after it has been in force during the insured’s lifetime for 2 years from its date of issue. The exceptions include nonpayment of premiums (Fla. Stat. § 627.455). Incontestability does not block every defense. It does not stop defenses based on policy terms that exclude or restrict coverage (Fla. Stat. § 627.463).

If an age or sex was misstated, the benefit changes. It becomes what the premium would have bought at the correct age or sex (Fla. Stat. § 627.456).

Written Consent: Why the Employee Signs First

The key employee signs written consent before the business buys the policy. Florida law requires that consent before the insurance is purchased. It also bars the business from retaliating against an employee who declines (Fla. Stat. § 627.404).

Florida law also says a contract on 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 the insured, with legal capacity, applies for or consents in writing on or before the time the contract is made. Fla. Stat. § 627.404 provides, in subsection (1), that an individual of legal capacity may obtain an insurance contract on his or her own life or body for the benefit of any person. A contract on another individual’s life or body is allowed only if 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 insurable interest need not exist after the inception date of coverage under the contract.” An owner of employer-owned life insurance must report whether it has valid consent for each insured employee. It must also report how many consents were not obtained (IRC § 6039I).

In practice, the signed consent comes before the insurer asks for medical information. Business owners should plan the conversation with the employee early, and in plain terms.

When Underwriting Requests a Paramedical Exam or Records

When the insurer needs more information, it may order a paramedical exam, request medical records, or ask the employee’s doctor for a statement. A paramedical exam is a visit to collect basic measurements and samples. Common steps include vital signs, height and weight, blood and urine samples, and an attending physician statement from the employee’s doctor.

Insurers may also check prior-insurance and industry records. Timelines vary. The insurer, not the business, decides what more it needs and when.

Streamlined and Accelerated Underwriting: What It Does and Does Not Mean

Some insurers offer streamlined or accelerated underwriting for certain ages and coverage amounts. These paths may reduce or skip the exam for some applicants. They do not remove the application. Health questions still apply, and the insurer may still require an exam or records if answers raise questions.

A common mistake is reading a no-exam path as a no-questions path. It is not. The insurer’s own underwriting guidelines set the eligibility rules, so the answers should come from the insurer’s terms.

Term or Permanent: How the Policy Type Affects the Process

Term and whole life key person policies can follow different underwriting paths. They can also face different requirements at application. Term coverage lasts for a set period. Whole life coverage is permanent. Whether a term policy can convert to permanent coverage, and whether that conversion needs new underwriting, depends on the policy terms. See our page on converting term to whole life.

The tax side matters too. Death benefits are generally excluded from gross income, subject to exceptions (26 U.S.C. § 101). Under the general rule for an employer-owned life insurance contract, the amount excluded from gross income of an applicable policyholder under IRC § 101 shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract. The cost of losing a key employee is a separate planning question. See what a key employee’s death costs a small business.

Key Takeaways

• A medical exam is often required for fully underwritten key person coverage, but it is not guaranteed for every applicant.
• Health questions apply to every application, and issue may depend on insurability.
• The insured employee’s written consent comes before any medical information is requested.
• Florida businesses can review state-specific context at the Florida key person insurance page.
• Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice.

Frequently Asked Questions

Talk Through the Underwriting Path for Your Key Employee

If a key employee’s health has just changed, or you are weighing coverage before a health event, you may feel pressed to decide. You don’t have to work through the underwriting steps alone. Contact NR CPAs & Business Advisors to request a coverage review. Nischay Rawal can talk through the questions the insurer is likely to ask. You can reach our team here.