Key person coverage for business owners over 60, planned with a CPA's view

Key person insurance for owners over 60 is a life insurance policy that a business owns on a key person. If that person dies, the death benefit goes to the company. Health questions and age shape whether an insurer will issue the policy and what it costs.

This guide explains how the policy works, how insurers review older owners, the alternatives to insurance, and what a coverage review looks at. NR CPAs & Business Advisors is a Miami CPA firm. Insurance is offered by its licensed agent, separately from the accounting practice.

What key person life insurance is and who it is for

Key person life insurance is a life insurance policy a business owns on a person whose death would cause the company a financial loss. Three parties are involved: the business as owner and beneficiary, the insured key person, and the insurer that issues the policy. The Insurance Information Institute says key person life or disability insurance compensates a business for financial losses caused by a key employee’s death or disability.

A key person is someone the company depends on. That can be an owner, a senior manager, or an employee with unique skills whose role brings in revenue, supports a loan, or holds client relationships.

Owners over 60 often raise this question for practical reasons. Succession may be on the calendar. Fewer working years may remain. Lenders or partners may ask how the company would keep running if the owner were gone. If you’re reviewing this for a parent or partner, the review starts from that business’s facts.

What the policy covers and how the amount is set

The policy pays a death benefit to the business, and the business decides how to use the money. Common uses include repaying company debt, covering payroll while the company finds a replacement, and paying for recruiting and training.

Florida law sets a basic rule. A business may insure a key person only if it gets that person’s written consent before buying the policy. The business may not retaliate against a key person who refuses. The Fla. Stat. § 627.404 insurable interest need not exist after the coverage starts.

Owners often estimate the amount using lost profits, money the company owes or is owed, the cost to hire and train a replacement, and any loan covenants. These figures give a starting point, not a final answer.

A term life insurance policy covers a set period. Fla. Stat. § 627.404 reads: “(5) A contract of insurance upon a person, other than a policy of prepaid funeral contract; group life insurance; or group or blanket accident, health, or disability insurance, may not be carried out unless, on or before the time of entering into such contract, the person insured, having legal capacity to contract, applies for or consents in writing to the contract and its terms, except that any person having an insurable interest in the life of a minor younger than 15 years of age or any person upon whom a minor younger than 15 years of age is dependent for support and maintenance may obtain a policy of insurance on the minor.” A whole life insurance policy is designed to provide coverage for the insured’s lifetime, as long as premiums are paid as the contract requires, and it can build cash value. The NAIC Life Insurance Buyer’s Guide explains the differences between term and permanent coverage. Whole life dividends are not guaranteed, so the review shows guaranteed and non-guaranteed values separately. Key person coverage differs from buy-sell agreement insurance and estate planning life insurance, which serve other purposes.

Why age 60 changes the underwriting picture

Insurers usually review an owner over 60 with health questions. They may also require an exam or medical records. A fully underwritten policy asks these questions, and issue may depend on insurability.

Insurers weigh several factors for older applicants:

• Current medical conditions and recent treatment
• Medications and medical history
• Tobacco use
• Height and weight
• Family history

Premiums come from the insurer’s underwriting and the applicant’s age at application. A rating means the insurer charges more, or limits the offer, because it sees added risk.

Review the policy’s terms too. Ask about renewability, cancellability, any age-based change in premiums or face amount, and exclusions. These terms matter as much as the monthly cost.

Funding alternatives: how owners cover the same risk without insurance

Owners can cover a key person loss without insurance, but each option has limits. Four common approaches are:

• Personal funds. The owner pays from savings. Cash may not be ready at the moment of loss.
• Company cash flow. The business uses operating money. Cash may be tight when the company needs it most.
• Business borrowing. The company takes a loan. Approval may be hard after a death, and the loan adds debt.
• A business sinking fund. The company saves a set amount over time. It takes years to build.

A CPA’s view of cash flow shows whether these approaches fit the company’s actual numbers. The right choice depends on the facts of the business, and the coverage review examines them.

Who may not be eligible for coverage

Some owners cannot get key person coverage on the terms they expect. Insurers may decline or postpone an application when health, current conditions, or age fall outside their guidelines. Guidelines differ from one insurer to another.

Consent is required. Without the key person’s written consent before purchase, the business cannot take out the policy under Florida law.

Age on the application must be accurate. If the insured’s age was misstated, Fla. Stat. § 627.456 says the benefit becomes what the premium would have bought at the correct age.

Replacing an existing policy needs care. Using policy values to buy another policy from the same insurer, for extra pay and without a real benefit to the owner, is churning.

How a coverage review works, step by step

A coverage review moves through five steps, from the first call to policy delivery.

1. Intake call. You describe the business, the key person’s role, and why you’re reviewing coverage now.
2. Fact gathering. You share financial statements, debts, ownership and buy-sell terms, existing policies, and health history as far as you choose.
3. Analysis. The review looks at coverage need, funding options, and tax and cash flow effects.
4. Written summary. You receive options in writing, with the insurer and policy form named for any specific policy discussed.
5. Application and delivery. Underwriting follows the application, and the policy is delivered once issued.

Timing varies with underwriting requirements and is not guaranteed. The coverage review carries a fee, and the firm discloses that fee in writing before any engagement.

Why NR CPAs & Business Advisors for this review

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals, and business owners across the United States choose and buy life insurance. That includes Indian-American households, business owners, and NRI owners.

Nischay Rawal is a licensed insurance agent and the responsible agent for this page. Insurance is offered by the licensed agent, separately from the accounting practice.

Our team looks at insurance terms alongside the company’s tax and cash flow. Under IRC § 101, life insurance proceeds paid by reason of death are generally excluded from gross income. For employer-owned contracts, the exclusion IRC § 101 describes is capped at the premiums and other amounts the policyholder paid for the contract, but that cap does not apply where the notice and consent requirements are met and the amount is paid to a member of the insured’s family, to a designated beneficiary of the insured other than the policyholder, to a trust established for the benefit of any such family member or designated beneficiary, or to the insured’s estate, or is used to purchase an equity (or capital or profits) interest in the policyholder from any of those persons. Applicable policyholders who own one or more employer-owned life insurance contracts issued after the date of enactment of this section (August 17, 2006) must file returns under IRC § 6039I, so the review checks which rules apply.

Frequently asked questions

Talk with us about your business’s coverage review

If you are reviewing coverage for a parent or partner over 60, or for the continuity of a business, you can contact us to schedule a coverage review. A plan that protects the business can also protect your loved ones. Contact our team or call us today to start a coverage review.