Protect the Business Your Family Depends On

Key person insurance is a life insurance policy that a business owns on someone whose work the company depends on. If that person dies, the policy pays the business. That payment can help cover lost revenue, recruiting costs, and debt while the company adjusts.

This page explains key person insurance for family business owners, from who the key person is to how the benefit is set and which tax rules to review.

What Key Person Insurance Is and Who It Is For

Key person insurance is a policy the business owns on an owner or employee whose skills, relationships, or signing authority the company relies on. The Insurance Information Institute says this coverage compensates a business for financial losses caused by a key employee’s death or disability.

Three parties are involved:

• Policy owner: the business.
• Insured: the key person.
• Beneficiary: usually the business.

This differs from personal life insurance, where a family member usually owns the policy and collects the benefit.

The policy is generally whole life or term life insurance. The business’s needs decide which type fits. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice of NR CPAs & Business Advisors.

A common fit is a family company where a parent holds key relationships and final say, while an adult child is being trained to take over. For the general overview, see key person insurance overview.

Why Family Businesses Face Unique Key Person Risks

In a family business, one loss can hit ownership, management, and lenders at the same time. Four patterns come up often.

• Roles overlap. A parent may be the main client contact, the bank contact, and the final decision-maker. The adult child may run daily operations. It can be hard to name the true key person.
• Control sits with a few people. When relatives own and manage the company together, a sudden loss can strain the shareholder agreement and the vote on who leads.
• Knowledge rests with one person. Customer relationships, vendor terms, and technical know-how often live with one family member. That concentration is the risk the policy addresses.
• Succession moves on its own timeline. Handoffs to the next generation are rarely fixed in advance. Coverage may need review as the adult child takes on more duties.

Owners based abroad face added questions. See key person insurance for owners based abroad.

What the Coverage Includes and How the Benefit Is Set

The death benefit is the amount the insurer pays to the business if the insured dies while the policy is in force. The business sets that amount from its own numbers.

Common inputs include:

• Estimated lost revenue during a transition
• Cost to recruit and train a replacement
• Debt a lender could call due
• Funding needed for a buy-sell agreement

Whole life insurance may build cash value. Dividends, where a policy pays them, are not guaranteed. Guaranteed and non-guaranteed values should be shown separately. The Florida Department of Financial Services guide covers policy types, cash value, and policy loans.

Term life insurance covers a set period. Renewal terms, age-based premium changes, and cancellation rules should be explained before the policy is issued.

Florida law requires every insurance contract to provide that the policy becomes incontestable after it has been in force during the insured’s lifetime for 2 years from its date of issue. Fla. Stat. § 627.455 sets out exceptions to incontestability, including nonpayment of premiums. Florida law also requires a grace period of at least 30 days for premiums after the first, under Fla. Stat. § 627.453.

Review limitations and exclusions before you buy. For help sizing the benefit, read how much a key person is worth to my business.

How Key Person Insurance Works Step by Step

The process starts with a coverage review and continues with periodic checks. Here is the usual sequence.

1. Coverage review. Nischay Rawal, a licensed insurance agent, looks at who the key person is, what that person does, and the business’s financial position.
2. Document the need. The business records why it insures this person and why it owns and benefits from the policy.
3. Written consent. Florida’s insurable interest rules under Fla. Stat. § 627.404 require that a business’s key person consent in writing before the insurance is bought. The business may not retaliate against someone who refuses.
4. Application and health questions. Health questions are required. Issue may depend on insurability.
5. Underwriting. The insurer reviews the application and may request medical or financial records. This step can take time.
6. Policy delivery and ongoing review. The policy is delivered and premiums are paid on schedule. The plan is reviewed as succession, debt, or ownership changes.

Costs, Premiums, and What Affects Them

Premiums depend on the insured’s age and health, the coverage amount, the policy type, how often premiums are paid, and any riders. A premium is a payment for coverage. No premium amount is quoted on this page.

Key cost factors include:

• Age and health of the insured
• Coverage amount
• Policy type, term or whole life
• Payment schedule, such as annual or monthly
• Riders added to the base policy

The NAIC Life Insurance Buyer’s Guide covers term versus permanent coverage and the questions to ask before buying. Term fits a set period of need. Whole life runs longer and may build cash value.

Premiums should be recorded in the business’s books. A CPA can help the business plan premium payments alongside payroll, debt, and other obligations.

Tax, Accounting, and Buy-Sell Considerations

Tax treatment depends on who owns the policy, who the beneficiary is, and how the business is set up. Review these points with the CPA before the policy is issued.

• Premium deduction. Under 26 U.S.C. § 264, no deduction is allowed for premiums on a life insurance policy if the taxpayer is directly or indirectly a beneficiary. When the business is the beneficiary, the premiums generally are not deductible.
• Buy-sell funding. Some shareholder agreements may take effect under Fla. Stat. § 607.0732 when they meet its requirements. That section allows shareholders to set rules for voting, management, and deadlock when the agreement is set forth or referenced in the articles of incorporation or bylaws and approved by all persons who are shareholders at the time of the agreement, or is set forth in a written agreement signed by all persons who are shareholders at the time of the agreement and made known to the corporation. Review the policy and the agreement together.
• Books and records. Proceeds and premiums should be recorded in the business’s books in a way that matches the policy and agreement terms.

Our CPA work and insurance advice are separate services. Insurance is offered by the licensed agent, separately from the accounting practice. Insurance is offered by the licensed agent, separately from the accounting practice, and the agent is paid a commission on policy sales. Fla. Stat. § 473.3205 requires any CPA firm that accepts a commission on the sale of a product or service to a client to disclose that fact in writing, in accordance with rules adopted by the board.

Why NR CPAs & Business Advisors for 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.

The firm combines two views. A licensed insurance agent handles the policy. A CPA reviews tax and cash flow. The two roles stay separate.

The firm serves clients in Florida, including Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa, and Jacksonville.

Our team includes assistants and office staff who support the firm’s work. Nischay Rawal is the responsible agent for this page.

Frequently Asked Questions

Talk With Our Team About Your Family Business

If you are planning for your family or for your business, you don’t have to sort it out alone. Planning often starts with a few plain questions about who runs what and what the company would lose.

Contact NR CPAs & Business Advisors to set up a coverage review of your family business’s key person needs. Protect your loved ones. Call us today.