Review Your Existing Key Person Policy Before Your Business Changes

An existing key person policy review checks whether the life insurance your business already owns still fits the company. It looks at the policy contract, the coverage terms, who owns and benefits from the policy, and how the books record it. This page gives a CPA’s checklist for that review. It covers a policy already in force, not a new sale.

What a key person policy does and who should review it

A key person policy pays the business if a key employee dies or becomes disabled. Key person life insurance is a policy on someone the business depends on, such as a top salesperson, a managing partner, or the person who holds key lender relationships. The Insurance Information Institute explains that this coverage compensates a business for financial losses caused by a key employee’s death or disability.

A policy bought years ago may no longer fit. Revenue may have grown, owners may have changed, or a lender may now ask about coverage. Any of these can leave the policy too small, too large, or owned by the wrong party.

The review is for owners, partners, and finance leads, along with the CPA who keeps the company’s books. Insurance is offered by the licensed agent, separately from the accounting practice. Nischay Rawal acts as the licensed insurance agent for this page.

How a coverage review works, step by step

An existing key person policy review starts with documents, and no change is made without the owner’s signature. The work usually follows these steps.

1. Gather the documents. Bring the policy contract, the latest premium statement, ownership and beneficiary forms, and any buy-sell or loan papers. Recent financial statements help too.
2. Compare the policy to the business. The agent and CPA check the policy terms against current financial statements and ownership records.
3. Receive written findings. The findings separate what is in place, what has changed, and the options available.
4. Decide in writing. You can keep the policy as is, adjust it with the insurer, or replace it. Nothing changes without your signature.

The timeline depends on how many documents you have and how many people must sign. Gathering the forms you will need before your coverage review can help keep the process organized.

Compensation is disclosed up front. A CPA or CPA firm engaged in the practice of public accounting that accepts a commission for selling a product or service to a client must disclose that fact to the client in writing, following the Board of Accountancy’s rules, under Fla. Stat. § 473.3205. Any CPA fee is explained in writing, with all its variables, before you agree to work together.

Coverage terms to check in the policy itself

The policy contract shows the terms that decide whether coverage still matches your need. Check each term against a written business need, not memory.

• Policy type. Term life insurance covers a set period. Whole life insurance lasts for the insured’s life and can build cash value. Know which one you own.
• Face amount. Compare the death benefit with the need, such as a loan covenant, buy-sell funding, or revenue that depends on the insured person.
• Premium and schedule. Confirm the amount, the payment period, and any age-based change written into the contract.
• Renewability and cancellability. Read what the contract says about renewal and whether the owner can cancel.
• Exclusions and limits. List them, and note the effective date of coverage.
• Guaranteed and non-guaranteed values. Dividends are not guaranteed. Any projection of future values has its own limits.

Two Florida rules also matter. Every contract must give at least 30 days to pay a premium after the first. The insurer may charge interest of up to 8 percent per year for those grace days, and coverage stays in force during that period (Fla. Stat. § 627.453).

After a policy has been in force for two years during the insured’s lifetime, the insurer generally cannot contest its validity, with exceptions (Fla. Stat. § 627.455). Exclusions and restrictions can still be raised as defenses (Fla. Stat. § 627.463).

Ownership, beneficiary, and tax treatment to confirm with your CPA

Ownership and beneficiary designations decide who receives the death benefit and who controls the policy. They must match the company’s current documents.

• Owner, insured, and beneficiary. Compare each name with the operating agreement, partner or shareholder records, and any buy-sell agreement.
• Premium entries. Ask how premiums have been recorded. The entries should match who owns and pays for the policy.
• Death benefit on the books. Review how a payout would be recorded and how it connects to any buy-sell obligation.
• Incidents of ownership. These are rights such as changing the beneficiary, borrowing, or surrendering the policy. Under IRC § 2042, insurance receivable by other beneficiaries counts toward the gross estate to the extent of the amount receivable by them, when the decedent possessed incidents of ownership at death, alone or in conjunction with any other person. 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.”
• Income tax. The IRS explains that death benefits are generally excluded from gross income, while interest paid on proceeds is taxable. The actual result depends on the facts of your business and how the policy is owned.

Income tax and estate inclusion are separate questions, so the review treats them apart. Keep records that support the treatment, such as policy statements, premium invoices, approvals, and notices sent to the insured.

Business changes that can make a policy out of date

A policy goes out of date when the insured person’s role, the company’s debts, or its ownership changes. Check each change against the policy’s terms.

• The key employee’s role has changed, or the person has left, retired, or cut back their work.
• The business has taken on new debt, a new lender, or covenants that mention key person coverage.
• Ownership has shifted, or a buy-sell agreement was signed, changed, or funded in a new way.
• The insured person’s written consent needs checking against current practice.
• Revenue, headcount, or client ties to that person have shifted enough to question the face amount.

When you spot a change, write it down with the date. That note becomes the starting point for the review.

Rules to follow before you change or replace a policy

Replacing a policy is not automatically better, so compare the costs of each option before you act.

• Written surrender information. If an agent recommends surrendering a cash-value policy without using the proceeds for another policy, the agent must first give written information. That includes estimated surrender charges, lost guarantees, possible tax consequences, and any forfeited death benefit. The agent keeps a copy and the date it was given (Fla. Stat. § 627.4553).
• No misleading comparisons. Knowingly making, issuing, or circulating an estimate, illustration, sales presentation, or other statement that misrepresents the benefits, advantages, conditions, or terms of a policy is an unfair or deceptive practice (Fla. Stat. § 626.9541).
• Exchanges. Federal law generally recognizes no gain or loss on exchanging one life insurance contract for another (IRC § 1035). That rule does not make every exchange a good one.
• Policy loans. Loan rules apply to policies with a cash surrender value and no premium in default. They do not apply to term policies or to term insurance benefits provided by riders or supplemental policy provisions (Fla. Stat. § 627.458).
• Lapse risk. If unpaid interest brings total debt up to the loan value, the policy may terminate. The insurer must mail at least 30 days’ notice first.

Describe each option in writing, with its consequences, in plain words.

Questions owners ask before changing a key person policy

An existing key person policy review works best when the documents are ready before the first meeting. If your policy or the facts behind it have shifted, contact NR CPAs & Business Advisors to schedule a coverage review. Our team will walk through the paperwork with you, and Nischay Rawal, the licensed insurance agent, will explain the insurance side.