How Key Man Insurance Works for Florida Businesses

How does key man insurance work? A business buys a life or disability policy on a person it depends on, pays the premiums, and collects the benefit if that person dies or becomes disabled. The money goes to the business, not directly to the person’s family. This guide explains the mechanics in plain words.

What key man insurance is and how it differs from personal life insurance

Key man insurance is a policy a business takes out on an owner, executive, or employee the company relies on. The policy pays the business if that person dies or becomes disabled. The Insurance Information Institute explains that key person life or disability coverage compensates a business for financial losses caused by a key employee’s death or disability.

Is key person insurance the same as life insurance? It uses life insurance policy forms, so yes, it is life insurance. The difference is who holds the policy. In personal coverage, the insured person usually owns the policy and names family as beneficiaries. In key person coverage, the business fills all three roles.

A key person usually has unusual skills, major client relationships, or real decision-making power. There are two common forms. Key person life insurance pays on death. Key person disability coverage pays when the person can no longer work. Each form fits a different kind of risk.

How the policy is set up: owner, insured, and beneficiary

The business is the owner, the premium payer, and the beneficiary. The key person is the insured. Because the company receives the death benefit, the money supports the business, not the insured person’s household.

Florida law requires written consent before a business can insure a key person. Under Fla. Stat. § 627.404, a business has an insurable interest in its owners, directors, officers, partners, and managers, and in its key employees or key persons, including those of any affiliate or subsidiary, if the key employees or persons consent in writing before the insurance is purchased. The business also may not retaliate against a key employee who refuses to consent.

Some owners use key person policies to fund a buy-sell agreement. That agreement sets how an owner’s share passes when they leave or die. Setup depends on the company’s ownership papers and entity type, so review them with the licensed agent and the firm’s accounting team. Nischay Rawal offers insurance as a licensed insurance agent, separately from the accounting practice.

What happens when the key person dies or becomes disabled

The business files a claim with the insurer. The insurer then reviews the claim under the policy’s terms. The company should expect to submit the claim documents the insurer requires.

The policy contract and the insurer’s claim process set the amount, the timing, and any exclusions or limits. This page does not predict how a claim will turn out for any business.

Companies often use the proceeds in a few common ways. They may cover lost revenue during a transition, recruit and train a replacement, pay business debts, or fund a buy-sell purchase. These are possible uses, not promised outcomes. Setup gaps tend to show up at claim time, so the ownership, beneficiary, and consent records matter from the start.

What key person coverage costs and how taxes apply

Cost depends mainly on the insured person’s age, health results, the coverage amount, and the policy type. Any premium figure comes during a coverage review, where the full terms are laid out.

The premium payment terms, including any grace period, are set out in the policy contract.

Federal tax rules work in two directions. Under 26 U.S.C. § 101, life insurance proceeds paid by reason of the insured’s death are not included in gross income as a general rule, but for an employer-owned life insurance contract, the exclusion is limited to the premiums and other amounts the policyholder paid for the contract, unless an exception applies. Premiums are different. Under 26 U.S.C. § 264, no deduction is allowed for life insurance premiums if the taxpayer is directly or indirectly a beneficiary under the policy. When the business is the beneficiary, it generally cannot deduct the premiums.

Where an insurance commission applies, Fla. Stat. § 473.3205 requires a CPA firm to disclose that commission to the client in writing.

Whole life or term: how the policy type fits a key person plan

Term life insurance covers the insured for a set period. Whole life insurance covers the insured for life, as long as premiums are paid, and can build cash value. The NAIC Life Insurance Buyer’s Guide explains the differences between term and permanent life insurance.

Whole life policies can allow policy loans. Under Fla. Stat. § 627.458, a policy must provide that, after it has a cash surrender value and while no premium is in default, the insurer will advance money on proper assignment or pledge of the policy and on the sole security thereof. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” That statute does not apply to term policies. A business should review loan terms carefully before borrowing against a policy.

The right type depends on how long the business needs coverage, its budget, and the key person’s role. A coverage review lets you compare these options side by side.

Questions to answer and how to start a coverage review

Start with a short list. Who is the key person? What would their absence cost the business? Who owns and pays for the policy? Who is the beneficiary? What do the company’s documents say?

You may be researching this after a partner’s health scare, a sudden departure, or a lender’s request. You may also be working on a company you did not set up alone. That’s a common starting point, and the questions above are a good place to begin.

If losing one key person would strain your company, request a coverage review with Nischay Rawal, a licensed insurance agent, through our contact page.