Key Person Insurance Premiums: What Florida Business Owners Should Know

Key person insurance premiums are recorded in the books based on two facts: who owns the policy and who is the beneficiary. Whether the policy is term or permanent then decides how each payment is split. Term premiums usually go to expense in the period they cover. Permanent premiums can be split between expense and a cash value asset.

Key person insurance is life insurance a business buys on an owner or key employee. According to the Insurance Information Institute, it compensates a business for financial losses caused by a key employee’s death or disability.

This guide walks through each case in plain words. It’s written for business owners, bookkeepers, and controllers. NR CPAs & Business Advisors is a Miami CPA firm. The bookkeeping points here are general, and your CPA should confirm the treatment for your specific policy.

Why Ownership and Beneficiary Decide the Entry

The owner and the beneficiary decide where a premium goes in the books. A policy the company owns and names itself to receive is handled differently from a policy an individual owns.

When the company owns the policy, pays the premium, and collects the death benefit, the premium is a company cost. The company’s books carry it. When an individual owns the policy and pays from personal funds, the premium usually stays off the company’s books.

Four terms come up often:

• Premium is the amount you pay the insurer to keep coverage in force.
• Cash surrender value is the cash value of a contract determined without regard to any surrender charge, policy loan, or reasonable termination dividends. Term policies don’t build it.
• Policy loan is money borrowed from the insurer, with the policy as security.
• Death benefit is the amount the insurer pays when the insured person dies.

For a business to buy coverage on a key person, Florida law calls for that person’s written consent before the purchase. The Florida insurable interest statute sets out that rule.

New to this coverage? The key person insurance guide explains how it works.

Recording Term Life Premiums as an Expense

Term premiums are usually recorded as an insurance expense in the period they cover. Term coverage runs for a set period and builds no cash value. So there is no asset to record.

A monthly premium paid in January uses a simple entry:

• Debit: insurance expense for January
• Credit: cash for the same amount

If you pay a full year in advance, record the payment as a prepaid asset. Then move one-twelfth of it to expense each month. Match each entry to the months the premium covers. Don’t simply book it in the month the bill was paid.

The premium amount depends on the insured person’s age, health, face amount, and policy type. Use the figure on the insurer’s billing statement, not an estimate. If the amount changes, record the new figure from the date it applies.

The NAIC Life Insurance Buyer’s Guide explains term and permanent life insurance in plain language. That difference is what drives the books. Keep it in mind before you post a single entry.

Recording Permanent Policy Premiums and Cash Surrender Value

Permanent policies, such as whole life, build cash surrender value. So one premium can serve two purposes. Part pays for the coverage. Part adds to the policy’s cash value.

Many bookkeepers split the entry this way:

• Debit: insurance expense for the cost-of-coverage portion
• Debit: cash surrender value asset for the cash value portion
• Credit: cash for the full premium

The split needs figures from the insurer, not a guess. Ask the insurer for an annual statement that shows the cash surrender value and the cost of coverage. Use that statement to set each year’s split.

To count as life insurance for federal tax purposes, a contract must meet the tests in IRC § 7702. One test limits how high the cash surrender value can go under the contract’s terms. That is one reason to tie the asset balance to the insurer’s statement.

Track guaranteed values and non-guaranteed values on separate lines. Illustrated figures are not guarantees. Show them with their stated limits, and never book a projected figure as a known balance.

Policy Loans, Cash Surrender Value, and Year-End Reporting

A policy loan does not reduce the net surrender value used in the tax definition, which is determined without regard to any policy loan, so check the loan balance separately at year end. Unpaid loan interest adds to the debt. Check both at year end.

Florida’s policy loan statute sets mechanics that matter for the books. After a policy has a cash surrender value and no premium is in default, the policy must provide that the insurer will lend against it, with the policy assigned or pledged as the sole security. The loan value must be at least the cash surrender value at the end of the current policy year, less listed deductions. The insurer can defer granting a loan, other than a loan used to pay a premium to the insurer, for six months after the application. The Florida policy loan statute sets these rules.

If total debt reaches the loan value, the policy can end, but only after at least 30 days’ notice is mailed. That statute does not apply to term policies.

Federal rules matter too. IRC § 264 generally bars a deduction for interest on loans against life policies the taxpayer owns, covering any individual.

Year-end steps:

• Confirm the cash surrender value against the insurer’s statement.
• Record any accrued loan interest.
• Check that the asset balance matches the statement.

Tax Treatment: Book Entries Are Not Always the Tax Return

The books and the tax return can treat the same premium differently. Book entries follow financial reporting. Tax treatment follows federal law and the facts of the policy.

Federal law generally treats death benefits as not gross income. 26 U.S.C. § 101(a) addresses that rule.

Whether the business can deduct a premium depends on the facts. Ownership, beneficiary, and policy type all matter. Confirm the premium’s tax treatment with your CPA before you file.

The company must also keep records that show it meets the rules.

Buy-sell agreement insurance is a different tool. It can raise its own tax and bookkeeping questions, so don’t assume the same entries apply.

When the Owner Pays the Premium Personally

If the owner pays a premium personally on a policy the owner owns, the company’s books do not record that premium. The payment belongs to the owner’s personal records.

Trouble starts when money moves between the owner and the company with no paperwork. A company that pays a premium, and later gets repaid by the owner, needs entries that match that flow. A reimbursement is not the same as a company payment, so the entries differ.

Write down the arrangement before the first payment. Keep a short agreement or note that shows who owns the policy, who paid, and how any repayment works. Undocumented transfers create reporting questions later.

Decide who pays with the policy’s ownership in mind. Bookkeeping ease should not drive that choice. A structure that looks simple on paper can still create questions when the books are reviewed.

Building a Clean Bookkeeping File for the Policy

Keep one file for each policy. Include the application, the policy contract, every premium invoice, proof of payment, and each annual statement.

Add a policy schedule that lists the policy number, insurer name, insured person, owner, beneficiary, and policy type. Update it each year, and check it against the contract.

Add a yearly roll-forward. It should show the opening cash surrender value, premiums paid, loans taken or repaid, interest accrued, and the closing balance. Show guaranteed and non-guaranteed values on separate lines, the way the insurer’s statement presents them.

If your company owns policies on several employees, the file should also hold the records needed for the employer-owned reporting rules described above. Store the file where your bookkeeper and CPA can both reach it. A new bookkeeper should be able to understand the policy from the file alone.

Frequently Asked Questions About Recording Key Person Premiums

Term premiums go to expense, and permanent premiums can be split between expense and cash surrender value. Match the entry to the policy type.

Talk With Nischay Rawal About Your Policy’s Books

If you own a key person policy and have questions about its coverage terms, a coverage review with our team is a practical place to start. Or a policy loan showed up on a statement with no clear entry.

You may be unsure whether a payment belongs on the expense line, the asset line, or in the owner’s personal records. Those questions are easier to settle with the policy’s contract and statements in hand.

Contact NR CPAs & Business Advisors to arrange a coverage review of your key person policy.

Insurance is offered by the licensed agent, separately from the accounting practice. Nischay Rawal is the responsible licensed insurance agent for this page.