Key Person Insurance Coverage Review: Step by Step

A key person insurance coverage review is a step-by-step process that starts with your first meeting and ends with a written summary. This guide explains each step in order: who does it, what it needs, and what comes next. Key person insurance is life insurance a business owns on the life of an owner or employee whose death would cause the business a financial loss. NR CPAs & Business Advisors is a Miami CPA firm. Insurance is offered by the licensed agent, separately from the accounting practice. Business owners in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa, and Jacksonville can use this guide as a checklist before their first call.

What a Key Person Insurance Coverage Review Covers

A coverage review is the firm’s first meeting on key person insurance, and it leads to a written summary. The review does not require you to buy a policy.

Here is how key person insurance works. The business owns a life insurance policy on a person whose death would hurt the company. That person may be an owner, an executive, or a worker with key know-how or client ties. The business is usually both the owner and the beneficiary, and the key person is the insured. The Insurance Information Institute explains that this coverage compensates a business for financial losses caused by the death or disability of a key employee.

Our team handles the business and tax questions. A licensed insurance agent handles the insurance side. For background on policy types and uses, read our key person insurance guide.

Step 1: The First Call and Initial Intake

Step 1 starts when you contact the firm. A team member collects basic facts about your business and sets the next step.

Who: You and our team. What it needs: The business name, entity type, state where it was formed, the number of owners, and the reason for your inquiry, such as a lender requirement or a buy-sell agreement. What comes next: We schedule the coverage review and list the documents to gather.

Insurance follows one more rule. Florida law requires an agent to clearly tell prospective insureds that they are acting as an insurance agent for insurance products and identified insurers (Fla. Stat. § 626.9531). Insurance is offered separately from the accounting practice.

Step 2: Gathering Business and Ownership Documents

Step 2 is where you gather the papers that show who owns the business and what it owes. Bring signed copies when you have them.

Who: You gather the documents. Our assistants and office staff help organize them. Documents to bring: Articles of organization or incorporation, the operating agreement or bylaws, a current ownership schedule with percentages, and the latest financial statements or tax returns. If you have them: The signed buy-sell agreement or loan agreement, including the valuation method and any personal guaranty terms.

A common mistake is bringing drafts, summaries, or emails in place of the signed agreements. A draft shows a plan, but it may not show what everyone actually agreed to. Send the full documents, not excerpts. Missing pages slow the review down.

What comes next: The team reviews the papers to confirm ownership and to identify which obligations depend on a key person’s life.

Step 3: Identifying the Key Person and Their Value

Step 3 names each key person and explains why the business depends on that person. This is the first real list you’ll build.

Who: You and the licensed agent work through each role together. What it needs: Each person’s title, responsibilities, compensation, and the revenue or contracts tied to that person. What comes next: A working list of key persons, with the reason each one is included.

Keep two questions apart. The first asks how much a person matters to the business. The second asks how much coverage the business might want. We review them separately. A high-value person doesn’t automatically mean a large policy amount.

Avoid listing everyone as key. A short, specific list makes the next steps clearer and easier to follow.

Step 4: Checking Insurable Interest

Step 4 checks whether the business has a legal stake in each key person’s life before a policy is considered.

Florida law says no one may buy insurance on another person’s life unless the benefit goes to that person, or to someone with an insurable interest when the contract is made (Fla. Stat. § 627.404). Under Florida law, a business entity has an insurable interest in the life, body, and health of any of the owners, directors, officers, partners, and managers of the business entity or any affiliate or subsidiary of the business entity, or key employees or key persons of the business entity or affiliate or subsidiary, if consent is obtained in writing from the key employees or persons before the insurance is purchased (Fla. Stat. § 627.404). That interest requires written consent from the key person before the insurance is bought. The business may not retaliate against a key person who refuses consent.

The insurable interest need not exist after coverage starts. For individual policies, the insured person, having legal capacity to contract, must apply for or consent in writing to the contract and its terms on or before it is entered into; this does not apply to a policy of prepaid funeral contract, group life insurance, or group or blanket accident, health, or disability insurance, and a person with an insurable interest in a minor younger than 15 may obtain a policy on that minor.

Who: The licensed agent checks each key person against the business’s financial stake. The CPA reviews the records that support that stake. What it needs: Financial records and documents that show what the business would lose or owe. What comes next: A clear list of who qualifies and who needs more documentation.

Step 5: Reviewing Lender and Buy-Sell Terms

Step 5 matches coverage amounts and timing to any loan or buy-sell obligation the business has. These terms often set the policy size.

A lender may ask for key person coverage. A buy-sell agreement may use life insurance to help fund the purchase of a deceased owner’s share. Florida law also says an individual party to a contract for buying or selling an interest in a business entity has an insurable interest in the life of each other party. That interest applies to that contract only (Fla. Stat. § 627.404).

Who: We review loan covenants, collateral, and buy-sell funding terms with you. What it needs: The loan and buy-sell documents, the amount and timing of each obligation, and any valuation or payment schedule. What comes next: A list of required amounts and timing that the policy designs must address.

For more on how these two arrangements connect, see our buy-sell agreement insurance page.

Step 6: Comparing Policy Designs

Step 6 compares term and whole life designs against the amounts and timing from Step 5. The goal is a clear side-by-side view.

Term life insurance covers a set period. Whole life insurance includes a cash value component. Dividends, where offered, are not guaranteed, so the review shows them apart from guaranteed values. Any growth or interest illustration shows its limits with equal emphasis.

Also compare the premium payment period, how long coverage lasts, and what happens if the policy is cancelled or lapses. Florida law requires every insurance contract to give at least 30 days to pay any premium after the first (Fla. Stat. § 627.453). The grace period is not a substitute for paying on schedule: the insurer may charge interest of up to 8% a year for the days of grace used, and if a claim arises during the grace period before the overdue premium (or any deferred premiums for the current policy year) is paid, those premiums with interest of up to 8% a year may be deducted from the settlement.

If an insurance agent recommends surrendering an annuity or life insurance policy that has a cash value and does not recommend using the surrender proceeds to fund or purchase another annuity or life insurance policy, the agent must provide written information about the policy before the surrender is executed. 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 forfeited as a result of the transaction. The agent must keep a copy of the information and the date it was provided to the owner (Fla. Stat. § 627.4553). Replacing one policy with another is a different transaction, governed by Florida’s separate replacement rules.

Who: The licensed agent. What comes next: The licensed agent names the insurer and policy form for any specific policy discussed, and the designs move to Step 7.

Step 7: The CPA’s View of Tax and Cash Flow

Step 7 shows how premiums, ownership, and policy proceeds may affect the business’s taxes and cash flow. The answer depends on the facts.

Federal law generally excludes life insurance death benefits from gross income. Interest paid on proceeds left with the insurer is taxable (IRS guidance). Federal law also generally bars a deduction for premiums when the taxpayer is a beneficiary under the policy, directly or indirectly (26 U.S.C. § 264).

Estate planning matters too. The gross estate may include insurance receivable by other beneficiaries on the decedent’s life, when the decedent held incidents of ownership (26 U.S.C. § 2042). Employer-owned life insurance contracts issued after the date of enactment of this section require the applicable policyholder that owns them to file a federal return for each year they are owned (26 U.S.C. § 6039I).

Who: The CPA reviews your financial statements and planned premium payments with you. What it needs: Your budget, current cash position, and expected premium amounts. What comes next: A cash flow summary that the agent and the CPA both reference in the written recommendation.

Insurance is offered by the licensed agent, separately from the accounting practice.

Step 8: The Written Summary and Recommendation

Step 8 ends with a written summary. The licensed agent prepares it, and our team reviews it with you.

What it includes: The key persons identified, the insurable interest findings, the lender and buy-sell requirements, the policy designs compared, and the insurer and policy form for any specific policy. It also lists the premium payment period, the limitations and exclusions, and whether the policy is renewable and cancellable.

Commission disclosure is part of this step. Under Florida law, a certified public accountant or firm may not accept or pay a commission or referral fee in connection with the sale or referral of public accounting services, and any certified public accountant or firm engaged in public accounting that accepts a commission for selling a product or service to a client must disclose that fact to the client in writing, in accordance with rules adopted by the board (Fla. Stat. § 473.3205).

What comes next: You decide whether to move forward, ask questions, or pause. The summary describes options and limits. It does not promise any result.

Scheduling Your Coverage Review

If your business depends on one or a few people, and a loan or buy-sell agreement depends on their continued life, a coverage review gives you a clear starting point. Bring the Step 2 documents if you have them. Then contact NR CPAs & Business Advisors to set up your coverage review.