How Long Key Person Insurance Takes to Pay Out

How long does key person insurance take to pay out? No single timeline fits every claim. The time depends on the facts of each claim, and it can move faster when the business sends complete papers early. Key person insurance normally pays the business that owns the policy. Under IRC § 101(a)(1), death proceeds are generally excluded from gross income, but IRC § 101(j) can limit that exclusion for an employer-owned life insurance contract. One exception applies when the amount is paid to a member of the insured’s family, to a designated beneficiary of the insured under the contract (other than the applicable policyholder), to a trust for the benefit of either, or to the insured’s estate, and the notice and consent requirements of IRC § 101(j)(4) are met. Florida law sets some rules that affect timing. Federal tax law affects how the payment is treated. This page walks through the steps in order, from notice to payment, and lists the questions to raise with your accountant.

What Key Person Insurance Pays and Who Receives It

The business owns the policy and collects the death benefit. Key person insurance is life insurance that a business owns on a person whose death would harm the company. That person may be an owner, an executive, or a key employee. The business pays the premiums and names itself as beneficiary. The Insurance Information Institute guide explains that this coverage compensates a business for financial losses caused by an employee’s death or disability.

The money goes to the business, not to the family. The business then decides how to use it. Many businesses use the funds to cover lost revenue, recruit and train a replacement, or pay debts.

Ownership decides who signs. If the business owns the policy and is the beneficiary, someone authorized by the business must act for it. A personal policy that names a family member follows a different path. Start by reading the owner and beneficiary lines on the policy.

Step One: Notify the Insurer and Gather the Core Documents

The business should notify the insurer promptly and collect the policy papers in one place. Call the insurer’s claim department. Have the policy number and the insured’s full name ready. Then gather the documents the insurer usually asks for:

• A certified copy of the death certificate
• The insurer’s claim form
• Proof of the insured’s identity
• The original policy and any amendments
• Premium payment records

Keep these in one folder. Missing pieces slow the claim.

Also find the written consent the business obtained from the insured. Keep that consent with the policy file. Use the insurer’s name on the policy in every letter, so you know exactly who is paying.

Step Two: The Insurer Reviews the Claim

The insurer checks that the policy was in force on the date of death. It also compares its records with the facts you send. First, the insurer confirms premiums were paid as the policy requires. Florida law requires a grace period of at least 30 days for any premium after the first. If a claim arrives during that grace period, the overdue premium, with interest of up to 8 percent a year, can be deducted from the payment (Fla. Stat. § 627.453). Check the premium record before you file.

Second, the insurer may review the application. Under Fla. Stat. § 627.455, the 2-year contestability period for a life policy runs from its issue date only while the policy is in force during the lifetime of the insured. Nonpayment of premiums is an exception, and so are, at the insurer’s option, provisions relative to benefits in the event of disability and provisions that grant additional insurance specifically against death by accident or accidental means (Fla. Stat. § 627.455). If the age or sex of the insured, or of any other individual considered in determining the premium or benefit, was misstated, the payment changes to what the premium would have bought at the correct age or sex, calculated in accordance with the insurer’s rate at date of issue (Fla. Stat. § 627.456).

Third, the insurer may ask for the cause and circumstances of death and for records from medical providers. Those records take time to release. Incomplete information often slows a claim.

Step Three: Ownership, Beneficiary, and Business Authorization Paperwork

When the business is owner and beneficiary, the insurer needs proof that the business exists. It also needs proof that the signer may act for the business. Expect to provide the business’s legal name, its federal tax identification number, and papers that show how the entity is set up.

Corporations usually provide a resolution or written consent signed by the proper officers. Partnerships and LLCs have their own papers, such as a partnership or operating agreement.

Before you submit, compare names, entity details, and signatures with the policy records. Small mismatches cause returned paperwork. Returned paperwork adds back-and-forth and more waiting.

Step Four: Payment of the Death Benefit to the Business

Once the claim is approved, the insurer pays the death benefit to the business. Payment follows the method on file for the business. Florida law adds interest to lump-sum death payments. The interest must be at least the Moody’s Corporate Bond Yield Average, monthly average corporate, as of the day the claim was received. It runs from the date the insurer receives written due proof of death (Fla. Stat. § 627.4615).

Interest runs from the date the insurer receives written due proof of death of the insured; the statute does not define written due proof. Sending complete proof early means the interest period starts earlier.

The death benefit is a payment under the policy’s terms. It is not a return on the premiums paid. The business decides how to use the funds. Keep a written record of the amount received and how the money is used.

What Commonly Adds Time to a Key Person Claim

Four kinds of problems commonly slow a key person claim.

• Missing or mismatched papers. A wrong entity name, a missing signature, or an old address can send the claim back for correction.
• Questions about the record. If the application, the issue date, or the premium history needs checking, the insurer verifies its records before it pays.
• More than one party. A buy-sell agreement or a lender with an interest in the policy can require extra paperwork and extra signatures.
• Medical or death records. Providers must release those records, and that step runs on their schedule.

Check each item before you file. A complete file gives the insurer less to chase.

Tax and Accounting Questions to Raise With the Business’s CPA

Federal law generally excludes life insurance death benefits from gross income when the payment is made because of the insured’s death. That rule appears in IRC § 101, which also lists exceptions. Ask how the policy was acquired and whether it changed hands.

Interest is a separate question. The IRS guidance on life insurance proceeds states that interest received on the proceeds is taxed.

Employer-owned contracts carry reporting duties. IRC § 6039I requires each applicable policyholder owning one or more employer-owned life insurance contracts issued after the date of the enactment of this section to file a return, at the time and in the manner the Secretary prescribes, for each year the contracts are owned, showing employee counts, insured employees, total insurance in force, the policyholder’s name, address, taxpayer identification number and type of business, and that the policyholder has a valid consent for each insured employee (or the number of insured employees without consent). The policyholder must also keep records. Ask whether those filings are in place.

For a personally owned policy, IRC § 2042 can bring insurance receivable by other beneficiaries into the gross estate. That applies when the decedent held incidents of ownership 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.” Ask your advisor how that rule applies to your facts.

Also ask how to record the receipt and intended use of the proceeds, so the books show the payment accurately. Insurance is offered through Nischay Rawal, a licensed insurance agent, separately from the accounting practice of NR CPAs & Business Advisors.

If This Is Happening to Your Business Now

If you’re working through a claim right now, a coverage review of the policy is a useful next step. You may be grieving, handling the claim, and covering duties you never expected to carry. That is a lot at once. A coverage review looks at who owns the policy, who is named as beneficiary, and what paperwork the insurer will need. Call NR CPAs & Business Advisors today to set up a coverage review.

Common questions