How Many Key People Should Your Florida Business Insure?

A small business should insure the people it cannot easily do without, not every person on its payroll. So the answer to how many key people should a business insure comes down to roles, not headcount. Each role gets tested against a few plain questions. Most businesses end up with a short list, and some end up with none.

This guide shows how to build that list. It also explains what the policy pays, how premiums and proceeds are generally treated for tax, and what to bring to a coverage review. Insurance is offered by Nischay Rawal, a licensed insurance agent in Florida, separately from the accounting practice of NR CPAs & Business Advisors.

The count comes from roles, not headcount

A business should insure the people whose loss would cause it a measurable financial harm. Key person insurance is a life insurance policy the business owns on someone it depends on. The business is the beneficiary. The Insurance Information Institute guide describes this coverage as compensation for financial losses caused by the death or disability of a key employee.

A business with a few staff may have one or two people who qualify. A larger company may have more. Some firms have none that pass the tests. A long workday or a senior title does not settle the question by itself. The real test is whether losing that person would cost the business real money, skills or credit.

Four tests decide who counts as a key person

A role usually belongs on the list when it passes one or more of four tests. Run each role through all four and write down your answers. Writing them down makes the list easier to defend later.

Revenue contribution. Does the person bring in, or directly manage, a meaningful share of sales or client relationships? If so, a sudden absence could cut income quickly.

Unique skill or knowledge. Could another person replace the technical know-how, licenses or institutional memory within a reasonable time? A role that only one person can perform well is a strong candidate.

Relationships and credibility. Does the person hold the lender, supplier or key client relationships the business relies on? Those ties often leave with the person, not with the company.

Lender or contract requirements. Has a bank, investor or landlord asked for coverage on a particular person as a condition of credit or an agreement? If so, that document answers the question. Read it first.

Owners, partners and co-shareholders

Owners who run daily operations usually meet the key person tests. Under Florida law, a business entity can insure its owners, directors, officers, partners and managers with their written consent, so a passive owner does not need to show a real loss to the business. An owner’s death can affect both daily operations and who controls the company, so the owner question often has two parts.

Florida law sets a consent rule for these policies. A business may insure its owners, directors, officers, partners, managers and key employees if it obtains their written consent before the policy is bought. The business also may not punish a key employee or key person who refuses consent. Under Fla. Stat. § 627.404, any individual of legal capacity may procure an insurance contract on his or her own life or body for the benefit of any person, but no one may procure one on another individual’s life or body unless 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, and that insurable interest need not exist after coverage begins.

When co-owners plan for an ownership transfer, buy-sell agreement insurance is a separate arrangement. It can sit beside key person coverage. The two should be reviewed together so they fit the same plan and the same set of owners.

How much coverage each key person may need

No fixed formula sets the amount. Each figure should come from the facts of that person’s role and the business.

Three reference points are common in practice. The first is the person’s contribution to profit over a set period. The second is the cost and time needed to recruit and train a replacement. The third is any business debt the person guarantees personally, since a lender may look to that person for repayment.

Some published guides offer multiples of salary. Treat those as rough starting points, not as a legal standard or a promise of the amount needed. A CPA’s view helps here. The number should line up with the business’s cash flow and records, so you can trace how it was reached. Write down the reasoning for each figure. Then revisit the note when revenue, staff or debt changes.

What the benefit pays and how premiums are treated for tax

Premiums are generally not deductible when the business is the beneficiary of the policy. Federal law denies a deduction for life insurance premiums if the taxpayer is directly or indirectly a beneficiary under the policy. See 26 U.S.C. § 264.

Death benefits are generally not counted as gross income. The rule has exceptions, including transfers for value, so the details matter. See 26 U.S.C. § 101. The IRS also explains that interest paid on proceeds left with the insurer is taxable. See the IRS guide on life insurance proceeds.

Employer-owned life insurance contracts are subject to the limits in section 101(j) of the Internal Revenue Code. Under 26 U.S.C. § 101(j)(1), the amount excluded from gross income of an applicable policyholder by reason of the death benefit is generally limited to the premiums and other amounts it paid for the contract, unless an exception applies, such as where the amount is paid to a member of the family of the insured, to a designated beneficiary other than the applicable policyholder, to a trust established for the benefit of any such family member or beneficiary, or to the estate of the insured. See 26 U.S.C. § 101, subsection (j). The business may use proceeds for lost income, recruiting or debt repayment. The accounting practice can review the tax and cash flow side. Insurance is offered by the licensed agent, separately from the accounting practice.

Key people who live or work outside the United States

A key person who lives or works abroad adds questions about residence, citizenship and ownership. Those questions come before any policy is picked. Treat residence as a fact to check, not a detail to skip.

Bring a short list of facts to the review. Note where the insured lives and works, the insured’s citizenship, and who owns the business entity. Also note who is named as owner and beneficiary, and what written consent documents already exist.

NRI life insurance is one part of this planning. The insured’s residence and the business’s ownership structure both shape which options make sense. The review lays out the options for that residence and the paperwork each one needs, so the business can compare them side by side.

Reviewing coverage as roles and ownership change

A key person list should be reviewed whenever a key role or ownership changes. Common triggers include a promotion, a departure, a cut in hours, a new owner, or a new loan requirement. Each change can move someone on or off the list.

Existing whole life policies need extra care. Cash surrender value is the amount the owner receives on a voluntary surrender of a policy before its maturity date. Florida law requires an agent who recommends a surrender, without recommending that the proceeds buy another policy, to provide written information first. See Fla. Stat. § 627.4553.

If an agent recommends surrendering an annuity or life insurance policy containing a cash value and does not recommend that the proceeds be used to fund or purchase another annuity or life insurance policy, the agent must provide the written information before execution of the surrender. That information includes, but is not limited to, the amount of any estimated surrender charge, the loss of any minimum interest rate guarantees, the possibility of tax consequences, the amount of any forfeited death benefit, and a description of any other investment performance guarantees being forfeited. The agent must keep a copy and the date it was given to the owner. Use the same standard for any review. Ask for the numbers in writing before a change is made.

Bringing your key person list to a coverage review

Many people arrive at this question after a shock. A partner may have fallen ill, or a key employee may have stepped back, and someone now has to decide quickly. If that is your situation, a written list of roles is a good place to start.

A coverage review is our first meeting. We work through your list role by role, review any documents that lenders or co-owners have requested, and explain whole life and term options in plain words. The coverage review carries a fee. The firm discloses that fee and what it covers before any engagement.

Nischay Rawal is the responsible insurance agent. He is a licensed insurance agent in Florida. Insurance is offered by the licensed agent, separately from the accounting practice of NR CPAs & Business Advisors. To request a coverage review, contact NR CPAs. For more background, see our key person insurance guide.

Frequently asked questions