Protect Your Florida Business If a Key Person Is Lost

To buy key person life insurance, a business applies for a policy on a key person’s life, pays the premiums, and usually names itself as owner and beneficiary. The process runs from a coverage review through underwriting to policy issue. This guide covers each step, the tax basics, and the questions owners ask most. It is written for Florida business owners, including those in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa, and Jacksonville.

NR CPAs & Business Advisors is a Miami CPA firm. We advise families, professionals, and business owners across the United States, including Indian-American households and business owners. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the firm’s accounting practice.

What Key Person Life Insurance Is and Who It Is For

Key person life insurance is a policy a business owns on someone whose death would cause it a measurable financial loss. A key person can be an owner, partner, executive, or employee. The test is whether losing that person would hurt revenue, client relationships, or daily operations.

A rainmaker at a professional practice, a founder at a small company, or a partner in a firm with a few owners often fits that test.

The business is usually the policy owner, the premium payer, and the beneficiary. That makes the policy a business asset, not a personal one.

Insurable interest is the rule that makes this work. It means the business has a real financial stake in the person’s continued work. Florida law says a business has an insurable interest in owners, directors, officers, partners, and managers, in any affiliate or subsidiary of the business, and in key employees or key persons. That holds only if those people give written consent before the insurance is bought. The business also may not retaliate against a key employee or key person who does not consent to the issuance of insurance on the key employee or key person’s life (Fla. Stat. § 627.404).

The Insurance Information Institute guide explains that this coverage compensates a business for losses caused by a key employee’s death or disability. For the broader overview, see our key person insurance overview.

What the Policy Covers and What It Does Not

The policy pays a lump-sum death benefit to the business when the insured dies, under the policy’s terms. The business can use that money for recruiting, lost revenue, debt payments, or steady operations. The money does not replace the person’s skills, judgment, or client trust.

Two common policy types are term and whole life:

• Term life insurance covers a set number of years.
• Whole life insurance lasts as long as the policy stays in force. Its guaranteed and non-guaranteed values are shown separately. Dividends, where offered, are not guaranteed.

Every policy has limits and exclusions. The coverage review walks through them before anything is filed. Florida law requires every insurance contract to become incontestable after it has been in force during the insured’s lifetime for two years from issue, except for nonpayment of premiums and, at the insurer’s option, provisions on disability benefits and additional insurance against death by accident or accidental means (Fla. Stat. § 627.455). That rule does not stop defenses based on provisions that exclude or restrict coverage (Fla. Stat. § 627.463).

Disability coverage and other living benefits are separate products. They carry their own terms.

Step by Step: From Coverage Review to Policy Issue

The buying process has five steps, and it starts with a coverage review.

1. Coverage review. Owners describe the business, the key person’s role, the revenue tied to that role, and what the proceeds should do.
2. Information gathering. The business supplies ownership records, the insured’s age and occupation, any existing coverage, and the amount under consideration.
3. Application and health questions. The insured answers health and lifestyle questions. Florida law says a contract of insurance upon 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, having legal capacity to contract, applies for or consents in writing to the contract and its terms on or before the contract is made (Fla. Stat. § 627.404). A fully underwritten policy may require exams, lab tests, or records review. Issue depends on insurability.
4. Underwriting. The insurer reviews the file and may approve, rate, or decline it. Timing varies by insurer and case.
5. Policy issue. The policy is issued with the insurer named and the policy form number shown. Owner and beneficiary designations are confirmed before delivery.

How Premiums and Proceeds Are Generally Treated for Tax

For key person policies, which are usually employer-owned, IRC § 101(j) can limit the income-tax exclusion for death benefit proceeds unless the notice-and-consent requirements are met before the policy is issued and an exception applies. Life insurance death proceeds are generally excluded from gross income, but when a policy is transferred for valuable consideration, the excluded amount is limited to the actual value of that consideration plus the premiums and other amounts the transferee later pays. Any sale or transfer of ownership needs a careful look.

The IRS guidance on life insurance proceeds explains the general rules and says the answer turns on the facts.

Interest is a separate issue. Interest paid on debt tied to life insurance policies that a taxpayer owns on an individual’s life is generally not deductible. A key person exception covers up to $50,000 of that debt. A key person is an officer or 20-percent owner.

Ownership also matters for estate tax. Under 26 U.S.C. § 2042, insurance receivable by the executor is included in the gross estate. Insurance held by other beneficiaries can be included too, if the decedent held ownership rights at death. IRC § 2042 reads: “For purposes of the preceding sentence, the term “incident of ownership” includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent.”

Owners usually budget premiums as a fixed business cost. Whole life cash values appear on a separate line from the death benefit, so the business can track each one.

What to Expect on Cost, Underwriting, and Ownership

The business usually owns the policy, pays the premiums, and names itself as beneficiary. A different structure may fit a buy-sell purpose.

Premiums vary with the insured’s age, health, tobacco use, coverage amount, and policy type. A coverage review produces the figure for the specific insured.

If health changes during underwriting, the insurer may rate, delay, or decline the case. Our team helps gather records and follow up on those requests.

Owners who need both coverages can fund a buy-sell agreement with life insurance. Our buy-sell agreement insurance page covers that topic.

Keep the premium schedule, the beneficiary designation, and any change in face amount or premium in the business’s records. Any fee for the coverage review is explained in writing before work begins, with every variable spelled out.

Why Work With NR CPAs & Business Advisors

NR CPAs & Business Advisors is a Miami CPA firm that reviews a key person policy alongside the business’s tax and cash flow position.

• One review, three views. The premium, the death benefit, and the business’s tax position are weighed together before any policy is recommended.
• Licensed insurance agent. Nischay Rawal, a licensed insurance agent, offers insurance separately from the firm’s accounting practice.
• Compensation in writing. Florida law requires a CPA or firm that accepts a commission on a sale to disclose it to the client in writing (Fla. Stat. § 473.3205). We disclose compensation in an engagement letter the client signs.
• Records and follow-up. Our team helps gather the paperwork and track underwriting requests.

Common Questions About Key Person Life Insurance

Key person life insurance fits a business when one person’s loss would cause a clear financial hit.

Talk With Our Team About Your Business’s Key Person

Key person coverage is worth a closer look when a partner’s health, a co-owner’s exit, or a key employee’s death could leave the business carrying a loss.

You may be reading this because a partner received a serious diagnosis or a co-owner is stepping back. You may also be dealing with a key employee’s death while the business absorbs the loss. Owners weighing that gap can read about what happens when a business partner dies without insurance.

A coverage review is a practical first step toward protecting the business and the people who depend on it. Call us today to set up your coverage review, or reach out through our contact page.