Key Person Insurance for Multiple Owners

What key person insurance means when several owners share a business

Key person insurance is life insurance a business buys on someone whose death would cause the company a financial loss. The Insurance Information Institute describes it as coverage that compensates a business for losses caused by a key employee’s death or disability.

When a business has several owners, each owner may be a key person. That means each owner may need a policy. This page covers key person insurance for multiple owners, from the owners who want each person insured to the partners who must decide how the coverage is split.

Key person coverage is often mixed up with a buy-sell agreement. The two work together, but they do different jobs. Key person coverage pays the business for the loss of a valued person. A buy-sell agreement sets what happens to an owner’s share when that owner leaves, retires, or dies. Life insurance can fund the buy-sell purchase.

How coverage is divided among owners

Owners set each policy amount by agreement, not by a fixed formula. The two most common approaches match coverage to ownership percentage or to each owner’s share of revenue.

Here is a simple example with made-up numbers. Suppose a business is valued at $3 million and two partners each own 50%. Matching ownership gives each partner $1.5 million of coverage.

Now suppose three owners hold 50%, 30%, and 20%. Matching ownership gives $1.5 million, $900,000, and $600,000. Sizing by revenue could shift those amounts if one owner brings in most of the clients.

Review the split whenever ownership percentages, revenue, or business debts change. A policy sized to last year’s numbers may not fit today’s business.

Ownership structures: entity-owned versus cross-purchase

An entity-owned plan means the business owns and pays for each owner’s policy and is the beneficiary. A cross-purchase plan means each owner owns a policy on each other owner and is that policy’s beneficiary. The structure decides who owns, who pays, and who receives the money.

Florida law sets some ground rules. A business has an insurable interest in an owner’s life when that owner gives written consent before the policy is bought (Florida insurable interest law). An individual party to a buy-sell contract for the purchase or sale of an interest in a business entity has an insurable interest in each other party, for that contract only.

Federal estate law can pull policy proceeds into an estate. The gross estate includes, to the extent of the amount receivable by other beneficiaries, insurance receivable by them if the decedent held incidents of ownership at death (26 U.S.C. § 2042). 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.” Who owns the policy therefore matters.

Settle the structure in writing before the policy is issued. The operating agreement or partnership terms should match it.

What a policy pays for and its limits

The death benefit goes to the beneficiary named in the policy. The owners then use the money as their signed agreement says. That can mean covering lost sales, recruiting a replacement, or buying out an owner’s interest.

A policy pays money. It does not run the business or restore lost client relationships.

Two policy types come up most. Term life insurance covers a set period. Whole life insurance covers the insured for life and builds cash value. Whole life policies usually have guaranteed cash values, while dividends, where the insurer declares them, are not guaranteed.

Limits matter. Florida law says an incontestability clause does not stop an insurer from raising defenses based on exclusions or restrictions in the policy (Fla. Stat. § 627.463). If an insured’s age or sex was misstated, the benefit adjusts to what the premium would have bought at the correct figures (Fla. Stat. § 627.456).

Federal tax rules also apply. Death proceeds are generally excluded from gross income, with exceptions. Interest paid on proceeds left with the insurer is taxable (26 U.S.C. § 101). Owners should confirm how these rules fit their structure with their tax advisor.

How the process works from first contact to issue

The process starts with a coverage review, our first meeting with the owners. We gather ownership details, revenue, buy-sell terms, and each owner’s age and health history. Then the steps follow in order.

1. Coverage review. We walk through ownership, revenue, buy-sell terms, and each owner’s age and health.
2. Structure and split. Owners choose entity-owned or cross-purchase and agree on each amount in writing.
3. Written consent and application. Each insured owner signs the application. Under Florida law, that signature serves as written consent. Health questions are required, and issue may depend on insurability.
4. Underwriting and issue. The insurer reviews the application and any medical requirements it sets, then issues the policy. Confirm the owner and beneficiary match the agreement.
5. Annual review. Revisit the split when ownership, value, or the buy-sell agreement changes.

The time to issue varies with each case and the insurer’s underwriting.

What drives the cost of coverage

Cost depends on several main variables. Insurers look at each owner’s age, health history, and tobacco use when they set the rate. The coverage amount per owner is another major factor.

Other variables include:

• Policy type and term length, or whether whole life is used
• Payment mode, such as annual or monthly
• Any change in face amount or premium over the policy’s life

For purposes of the key-person interest rule in § 264, a key person is an officer or 20-percent owner, with the number of individuals so treated capped (26 U.S.C. § 264). That definition affects how tax rules apply, so check it with a tax advisor when you choose a structure.

In a coverage review, we walk through these variables so owners can see how each one applies to them. Premium figures come from that review, based on the owners’ own facts.

Why owners work with NR CPAs & Business Advisors

NR CPAs & Business Advisors is a Miami CPA firm. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice.

The firm looks at insurance alongside tax and cash flow. Coverage choices are reviewed with the business’s finances and the owners’ tax position. That helps owners see how a policy fits the rest of the business.

The firm helps families, professionals, and business owners across the United States. That includes Indian-American households and business owners. The firm also works with business owners in Florida.

Our support staff helps with scheduling and document collection. The goal is to protect your loved ones and the business they depend on.

Common questions from multi-owner businesses