Explaining Key Person Insurance to Your Staff in Florida

To explain key person insurance to employees, say three things. The business owns the policy, pays the premiums, and receives the death benefit. The policy protects the company, not the employee. This page covers what to say, what to leave out, and the Florida rules that apply. For background, see our key person insurance guide.

What is a key person insurance policy?

Key person insurance is a life insurance policy that a business owns and pays for on a person whose work matters to the company. The Insurance Information Institute guide describes it as coverage that compensates a business for financial losses caused by a key employee’s death or disability.

There are three roles, and each one has a plain meaning:

• Policy owner: the business. It applies for the policy and controls it.
• Insured: the key person. The policy insures this person’s life.
• Beneficiary: the business. It receives the death benefit.

The employee doesn’t own the policy and doesn’t receive the death benefit. The policy can be written as whole life or term life. Whole life lasts as long as premiums are paid and builds cash value. Term life covers a set period. The business chooses the form that fits its goals.

The short answer: the policy protects the business, not the employee

The death benefit goes to the business. The company can use it to handle the financial impact of losing that person’s work. That can mean recruiting, training a replacement, or covering lost revenue while the business adjusts.

The benefit is not wages, severance, or a retirement benefit for the employee. Don’t describe it as something the employee gets or joins. Say that the company owns the policy on that role.

Many confusions start with the words “life insurance.” Staff often assume the policy is for their own family. Clear wording prevents that, and it keeps the explanation accurate.

What to tell employees and the key person

To explain key person insurance to employees, keep the message short and accurate. A simple script works: “The company owns a life insurance policy on your role. The company is the beneficiary. The policy does not change your pay, your job, or your benefits.” Adjust the wording to the actual facts.

Florida law sets consent rules. Under Florida law, a business entity has an insurable interest in its key employees or key persons if their written consent is obtained before the insurance is purchased. A key employee or key person means someone whose position or compensation is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code. Questions about insurable interest often come up in key person planning, and the licensed agent can explain how the concept applies to a particular situation. The business also may not retaliate against someone who refuses to consent, under Fla. Stat. § 627.404. Get the written consent on or before the time the contract is entered into, not after. 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.”

Health questions are usually part of underwriting. Issue depends on insurability. Tell the key person this before the process starts, so the health questions don’t come as a surprise.

Decide in advance what the business will share. Most owners share the policy’s existence, its purpose, and who the beneficiary is. Policy amounts and cash-value details usually stay within the owners and the people who keep the company’s records.

What to tell co-owners and how buy-sell coverage fits

Co-owners need to know who owns each policy, who pays the premiums, and who receives the death benefit. Buy-sell agreement insurance is often used to fund a buyout of a deceased owner’s share under the agreement’s terms.

There are two common structures, and the written agreement decides which one applies:

• Entity purchase: the business owns policies on each owner and is the beneficiary.
• Cross-purchase: each owner owns a policy on the other owners and receives the benefit.

Explain the structure in plain words before anyone signs. Buy-sell coverage is a business planning tool. Review the policy amounts together with the written agreement so the two match.

What the key person policy does not do

A key person policy does not pay the employee, replace pay, or replace pension or health benefits. The employee has no claim on the death benefit.

It is not employee life insurance. The employee is the insured, not the policy owner or the beneficiary.

The death benefit does not guarantee the business will survive a loss or keep its profits. It is one tool for planning around a loss.

The policy has limits and exclusions. The written contract sets them out. Review them before describing the coverage to anyone, so the explanation matches the contract.

Sharing the facts accurately, and the tax points for owners

Describe key person insurance as a business-owned life insurance policy. Don’t call it an investment, a savings plan, or a promise of returns.

Whole life values have guaranteed and non-guaranteed parts. Dividends, where a policy pays them, are not guaranteed. Say so whenever you mention cash value or dividends.

On taxes, premiums are generally not deductible when the taxpayer is a beneficiary. 26 U.S.C. § 264 bars a deduction for premiums on any life insurance policy when the taxpayer is directly or indirectly a beneficiary. Under 26 U.S.C. § 101, death benefits are generally excluded from gross income, subject to exceptions. Employer-owned policies also fall under special rules in § 101(j). Tax results depend on the facts, so confirm them before you rely on them.

Our team’s CPA view covers tax and cash flow. Insurance is offered by the licensed agent, separately from the accounting practice.

Talk to us about your coverage review

If you must explain a key person policy to a manager, staff member, or co-owner, a coverage review is a good place to start. You want the facts stated accurately before that conversation happens. This applies to Florida owners in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa, and Jacksonville, including Indian-American and NRI owners.

Nischay Rawal is the responsible licensed insurance agent for this page. When he discusses insurance products and insurers, he acts as a licensed insurance agent. A coverage review is a conversation about your situation. It doesn’t promise any approval, outcome, or result.

Fees for a coverage review are disclosed in writing before any work begins. To request a coverage review, visit our contact page.

Common questions