Protect Your Consulting Firm When a Key Person Is Lost

Key person insurance for a consulting firm is a life insurance policy the business owns on an essential person. If that person dies, the death benefit is paid to the business, not to the family.

This page explains how the coverage works, what it does not cover, and which tax points a CPA reviews. NR CPAs & Business Advisors is a Miami CPA firm. Nischay Rawal, a licensed insurance agent, offers the insurance, separately from the firm’s accounting practice.

What key person insurance is and who a consulting firm needs it for

The business pays the premiums and receives the death benefit. The Insurance Information Institute explains that this coverage compensates a business for financial losses caused by a key employee’s death or disability.

This is a business policy, not a family policy. A personal policy protects a family. A key person policy protects the business from losing one person’s value.

It fits a founder, principal or partner whose name, relationships or methods drive client work. It also fits a senior person who holds the main contacts for key accounts.

Florida has a consent rule. Florida law sets an insurable-interest requirement for a business that insures the life of an owner, officer, partner, manager or key person, and the signed application is treated as that person’s written consent. See Fla. Stat. § 627.404.

Why client relationships make one person a key person

A person becomes a key person when clients buy from that individual, not only from the firm’s name. When that person dies, work can stall even if the staff remains.

Common exposures in a consulting practice include:

• Retainers that rely on one lead consultant
• Pending proposals that only one person can close or explain
• Client methods and knowledge held by one person
• Lost momentum with a key account during a handoff
• Contracts that name a specific person

Read your own client agreements. Some contracts name a specific person or include terms that apply if that person leaves or dies. Review those terms before you set the coverage amount.

A cash gap can also open. Revenue may slow while the firm stabilizes, hires or moves accounts to other staff. Payroll, rent and debt payments keep coming due. Map each key account to the person who holds it. That map shows where the exposure sits.

What the policy covers and what it does not

The policy pays a death benefit to the business if the insured dies while the policy is in force. Payment follows the policy’s terms, exclusions and limits.

The business chooses how to use the money. It might cover operating costs, debt, recruiting or a transition plan for client relationships. The policy does not require a particular use.

Key terms in plain words:

• Face amount: the death benefit the policy pays.
• Premium: the amount paid to keep the policy active.
• Payment period: how long premiums are due.

Term life insurance covers a set period. Whole life insurance can build cash value. For whole life, we show guaranteed and non-guaranteed values separately.

A life policy pays on death only. Disability, or lost income from illness, is a different coverage. An incontestability clause limits challenges to a policy’s validity, but insurers can still rely on exclusions and restrictions. See Fla. Stat. § 627.463.

The application includes health questions. Underwriting can lead to a decline or a different rating. Issue may depend on insurability.

Tax and cash-flow points to review with a CPA

Premiums are generally not deductible when the business is the beneficiary. Federal law denies a deduction for premiums on a life policy if the taxpayer is directly or indirectly a beneficiary. See IRC § 264.

Proceeds are not always exempt from tax.

Some business-owned policies also carry IRS reporting. Under IRC § 6039I, certain employer-owned policies require an annual return and supporting records. The return covers employee counts, insured employees, insurance in force, consent, and the policyholder’s name, address, taxpayer identification number, and type of business.

Record premiums and proceeds in a way that matches the business’s legal structure. Owner and beneficiary designations should line up with the entity. A CPA review checks this against the policy paperwork.

Plan the cash flow too. Budget the annual premium next to other fixed costs. Track any cash values the policy builds, so the numbers stay clear.

How the process works, step by step

The process starts with a coverage review. It then moves through information, options, application, underwriting and policy delivery. Timing varies with the insurer and the case.

1. Coverage review. We talk through the insured person, the business structure, the client exposures and the goal for the coverage.
2. Information gathering. The business provides ownership details, financial context and the insured’s health and occupation information. Written consent from the insured must be in place before purchase.
3. Options and illustrations. Any growth or interest illustration comes with its limitations, stated as clearly as the figures.
4. Application and underwriting. The application includes health questions. The insurer decides issue and rating.
5. Policy delivery. The owner receives the policy, including the insurer and the policy form, and we review its terms together.
6. Ongoing review. Coverage is updated when ownership, key clients or partners change.

Why NR CPAs & Business Advisors handles this coverage

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals and business owners across the United States, including Indian-American households and business owners, choose and buy life insurance. That includes Florida business owners.

The firm reviews coverage with tax and cash-flow effects in view. Nischay Rawal, a licensed insurance agent, is the responsible agent for this page. Insurance is offered by the licensed agent, separately from the accounting practice.

Florida requires a CPA firm that accepts a commission on a product sold to a client to disclose that fact in writing. See Fla. Stat. § 473.3205. Fees, including for a coverage review, are disclosed in writing before work begins.

Frequently asked questions