Key Person Insurance Death Benefit in Florida: Who Gets Paid?

A key person insurance death benefit is the payment a life insurer makes when a covered key person dies while the policy is in force. In a standard arrangement, the business owns the policy, pays the premiums, and receives the money. This page explains who gets the payment, how the amount is set, how it is taxed in general terms, and what the business can use it for. It is written for Florida business owners and partners who want to understand the policy.

Who Owns, Pays for and Receives the Death Benefit

In a standard key person arrangement, the business owns the policy, pays the premiums, and receives the death benefit. The three roles are easy to mix up, so here they are in plain words.

The owner controls the policy. In most key person cases, the owner is the business. The insured is the key employee or owner whose life is covered. The beneficiary is the person or entity named to receive the death benefit. Usually, that is the business too.

Key person life insurance is one way a business can offset the financial impact when a key employee dies or becomes disabled. For background on the topic, see the Insurance Information Institute.

The death benefit goes to the beneficiary named on the policy. It does not go automatically to the insured’s family. If the business is the beneficiary, the business receives the money and decides how to use it.

How money reaches the insured’s family depends on the business’s own arrangements, such as a buy-sell agreement. The key person policy does not decide that by itself.

Is Key Man Insurance the Same as Life Insurance?

Yes. Key man insurance is an older term for life insurance that a business buys on someone whose work it depends on. Key person insurance is the more common modern name for the same idea.

The policy is a life insurance contract. It can be term life insurance, which covers a set period. It can also be whole life insurance, which lasts for the insured’s life. The contract type decides how long coverage lasts and whether the policy builds cash value.

Because it is a life insurance contract, the insurable interest rules apply. Florida law says a business entity has an insurable interest in the life of its owners, directors, officers, partners, managers, and key employees or key persons. That interest depends on written consent from the person, obtained before the insurance is bought. The business may not retaliate against someone who refuses. Fla. Stat. § 627.404 sets out these rules.

For the overall picture of how this coverage works, see our key person insurance guide.

Primary, Contingent and Successor Beneficiaries Explained

The primary beneficiary is paid first. A contingent beneficiary is paid only if the primary beneficiary cannot receive the money. A successor beneficiary is a further fallback name in the designation.

Here is how that works. Suppose the primary beneficiary is the company. If the company no longer exists when the insured dies, the contingent name steps in. A successor name covers changes that happen after the first two names.

Review these names when ownership changes. A name that made sense years ago may no longer match the business.

The beneficiary designation on the policy controls who is named. The company’s governing documents, such as its operating agreement or bylaws, should be read alongside it.

Beneficiary choice also matters under Florida law. Under Fla. Stat. § 222.13, when a person residing in Florida dies leaving life insurance, proceeds payable to a designated beneficiary are exempt from the insured’s creditors unless the policy or a valid assignment says otherwise. If the insurance is payable to the insured, the insured’s estate, or the insured’s executors, administrators, or assigns, the proceeds become part of the insured’s estate for all purposes. Fla. Stat. § 222.13 reads: “Notwithstanding the foregoing, whenever the insurance, by designation or otherwise, is payable to the insured or to the insured’s estate or to his or her executors, administrators, or assigns, the insurance proceeds shall become a part of the insured’s estate for all purposes and shall be administered by the personal representative of the estate of the insured in accordance with the probate laws of the state in like manner as other assets of the insured’s estate.”

How the Death Benefit Amount Is Set

The death benefit is a face amount the business selects when it applies for the policy. The right number reflects what the key person’s loss would cost the business. It is not a standard figure for every company.

Common inputs include:

• The person’s role and how much of the business depends on it.
• Revenue the person helps produce.
• Costs to recruit, hire, and train a replacement.
• Business debts the person’s role supported.
• Payroll and vendor bills the business must keep current during a transition.

This is a planning decision. Work through these inputs with the business’s financial records and with the people who know the role best.

A larger face amount generally means a larger premium. Premiums also depend on the insured’s age and health when the policy is issued.

The face amount can sometimes be changed later. Whether it can depends on the policy terms and underwriting. Ask the insurer how changes work before you buy.

Income Tax Treatment of the Payout

The general federal rule is that life insurance death benefits are not counted as gross income, but for an employer-owned contract the exclusion can be limited to the premiums and other amounts the policyholder paid unless an exception applies. For general information on how the IRS describes the tax treatment of life insurance proceeds, see the IRS guidance on life insurance proceeds.

There are exceptions to know about. If a policy is transferred for value, the excluded amount is generally limited, subject to statutory exceptions, such as transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer. It cannot exceed the value given for the transfer plus the premiums and other amounts the new owner later pays.

Interest is a separate issue. IRC § 264 generally denies a deduction for interest on debt tied to life insurance a taxpayer owns on any individual. A key person exception covers up to $50,000 of that debt, but only for an officer or 20-percent owner, and only a limited number of people can be treated as key persons. Larger amounts are not covered by that exception.

Income tax is a different question from estate tax.

The tax result depends on the facts of your business and your policy. Our CPA practice reviews these questions separately from the insurance, which our licensed agent offers.

What the Death Benefit Can Pay For

Once paid, the death benefit belongs to the business, which decides how to use it. The policy does not limit those uses. The business’s own legal duties and governance documents still apply.

Proceeds may be directed toward:

• Covering lost revenue during a transition period.
• Paying recruiting, hiring, and training costs for a replacement.
• Repaying business debt that depended on the key person’s role.
• Keeping payroll and vendor bills current while the business reorganizes.

Some businesses plan ahead for a buy-sell agreement. Under that agreement, owners set how an owner’s share will be bought after death or departure. If the business has one, policy proceeds may help fund the purchase. We cover that planning area on our buy-sell agreement insurance page.

No particular use is promised to produce a particular result. The right use depends on the business, its documents, and its obligations.

Reading an Illustration of Death Benefit Values

An illustration is a projection, not a promise. It shows how values might look under stated assumptions. Actual results can differ.

Ask for guaranteed values and non-guaranteed values shown separately. Guaranteed values are the ones the policy states as fixed. Non-guaranteed values depend on factors the insurer does not promise. Dividends, where a policy pays them, are not guaranteed.

Every limitation in the illustration deserves the same attention as the favorable figures. If a number is highlighted, read the assumption behind it and the exclusions printed nearby.

Before you decide, ask for these items:

• The insurer’s name.
• The policy form number.
• The premium and how long you pay it.
• The stated limitations and exclusions.
• Whether the premium or face amount can change, and any age-based changes.

Records That Support a Claim

A business should keep the signed policy, the beneficiary designation, the insured’s written consent, and records showing why the business has an insurable interest in that person. Keep these with the company’s corporate records. Update them when roles change.

Insurable interest matters from the start. Under Fla. Stat. § 627.404, the insurable interest is judged when the contract is made. Fla. Stat. § 627.404 reads: “(1) Any individual of legal capacity may procure or effect an insurance contract on his or her own life or body for the benefit of any person, but no person shall procure or cause to be procured or effected an insurance contract on the life or body of another individual unless the benefits under such contract are payable to the individual insured or his or her personal representatives, or to any person having, at the time such contract was made, an insurable interest in the individual insured.” Under Fla. Stat. § 627.404(1), the insurable interest need not exist after the inception date of coverage under the contract.

Employer-owned policies carry more reporting. Under IRC § 6039I, an owner of one or more employer-owned life insurance contracts issued after the date of enactment of that section must file a return. That return shows whether a valid consent exists for each insured employee. The owner must also keep the records needed to show those requirements are met.

When a policy pays a lump sum at death, Florida law requires interest. Fla. Stat. § 627.4615 requires interest, at an annual rate equal to or greater than the Moody’s Corporate Bond Yield Average-Monthly Average Corporate as of the day the claim was received, from the date the insurer receives written due proof of death.

For more detail, see our key person written consent page and our insurable interest in a business page.

Talk Through Your Business’s Situation With Our Team

A business can talk through key person death benefit questions with a licensed insurance agent before it makes a decision. You may be reading this for a company you did not set up. Planning for changes in key employees or partners is one part of business continuity planning. A buy-sell transaction may be on the calendar.

Those situations raise real questions about who receives money, when, and under which documents.

Insurance is offered through Nischay Rawal, a licensed insurance agent in Florida, separately from the accounting practice of NR CPAs & Business Advisors. Ask about fees before you schedule a coverage review. To set one up, contact our team.