Key Person Insurance for Your S Corp in Miami

Key person insurance for S corp ownership is a life insurance policy the company applies for and holds on someone whose death would cost the business money. The company, not the family, usually receives the death benefit. This page explains who owns the policy, who can be insured, what the benefit can pay for, and how the tax rules generally work. It is written for owners, shareholders, and officers weighing this decision, often for a co-owner or family member.

What Key Person Life Insurance Is in an S Corporation

Key person life insurance is a life insurance policy a business buys on a key person’s life. The business pays the premiums and receives the death benefit if that person dies. The Insurance Information Institute describes this coverage as compensation for a business’s financial losses from a key employee’s death or disability.

In an S corporation, the key person is usually a shareholder-owner, an officer, or another key employee. Under the statute, a key employee or key person is someone whose position or compensation fits the definition in section 101(j)(2)(A)(ii) of the Internal Revenue Code, not someone defined by revenue-generating skills. Losing that person can slow sales, delay projects, and strain cash flow. A personal life insurance policy works differently. Under IRC § 101(a)(3)(A), the rule in the second sentence of paragraph (2) is set aside for a transfer of a life insurance contract, or any interest in it, that is a reportable policy sale. That rule concerns transfers of this kind and does not describe who owns a personal policy or who receives the benefit. An individual owns it, and the family usually receives the benefit.

Two generic policy types come up most often. A term life insurance policy covers a set period. A whole life insurance policy lasts for the insured’s life and can build cash value. The NAIC Life Insurance Buyer’s Guide explains the differences between term and permanent coverage and lists questions to ask before buying.

This page is for shareholders, co-owners, and family members who want to understand the company’s options before anything is signed.

Who Owns the Policy, Who Is Insured, and Who Gets Paid

In most key person plans, the company owns the policy, the company is the beneficiary, and the key person is the insured. These roles are set on the application, so decide them early.

Florida law sets consent rules that matter here. Under Fla. Stat. § 627.404, a business entity has an insurable interest in the life, body, and health of its owners, directors, officers, partners, and managers, any affiliate or subsidiary of the business entity, and key employees or key persons, if those people give written consent before the insurance is bought. The statute also bars the business from retaliating against or taking adverse action against a key employee or key person who refuses consent.

Shareholders and non-shareholder key employees raise different questions. A shareholder’s stake may connect to a buy-sell agreement. A key employee who owns no stock still needs to give written consent before the insurance is purchased.

Not every person qualifies. Underwriting decides whether an applicant is issued a policy, issued with rated terms, or declined. Insurable interest and written consent must both be in place before purchase, and neither can be assumed.

What the Death Benefit Pays For and How Policy Types Differ

The death benefit goes to the company, and the company decides how to use it. The policy does not set those uses. Owners often discuss a few common uses with their accountant and attorney:

• Replacing lost revenue while the company recruits or trains a successor.
• Paying company debts that depend on the key person.
• Funding a transition to a new leader or a buy-out.

Term and whole life work differently. A term policy has a set coverage period and usually no cash value. A whole life policy has cash value that builds over time, and the owner may be able to borrow against it. A coverage review compares these structures against the company’s exposure.

Guaranteed and non-guaranteed values are shown separately. If a policy pays dividends, they are not guaranteed. Renewability, the premium period, and any age-based change are reviewed for each specific policy. We name the insurer for any policy we discuss.

How the Process Works, Step by Step

The process moves from a coverage review to an application, underwriting, issue, and annual review. Each step can change the next, so timing varies.

1. Coverage review. We identify the key person, the company’s exposure, and the ownership structure.
2. Application and consent. The key person answers health questions and gives written consent before the policy is bought.
3. Underwriting. The insurer reviews health and other information. Fully underwritten policies require health questions, and issue may depend on insurability.
4. Issue. The policy is issued with the company as owner and beneficiary, as the application states.
5. Annual review. We revisit coverage when ownership, roles, or the company’s needs change.

No set issue date is promised. Each underwriting file moves at its own pace, so plan the timeline around your company’s needs.

Tax Basics: Death Proceeds, Premiums, and Policy Loans

Death proceeds on employer-owned coverage are generally excluded from income only if the insured’s status and the notice-and-consent conditions are met; otherwise they are excluded only up to the premiums and other amounts the company paid. For employer-owned life insurance, the tax treatment of death benefits can depend on conditions such as the employee’s written consent to being insured before the contract is issued.

Employer-owned policies also carry a reporting duty. Under IRC § 6039I, every applicable policyholder owning one or more employer-owned life insurance contracts issued after the date of the enactment of this section must file a return, at such time and in such manner as the Secretary prescribes, showing for each year the contracts are owned the number of employees at year end, the number of such employees insured at year end, the total amount of insurance in force at year end, the name, address, and taxpayer identification number of the policyholder and the type of business in which it is engaged, and that the applicable policyholder has a valid consent for each insured employee (or the number of insured employees for whom such consent was not obtained).

Policy loans need care. Interest paid or accrued on debt with respect to life insurance policies the taxpayer owns covering any individual’s life is generally not deductible under IRC § 264(a)(4), subject to the exceptions in the statute. Under IRC § 6039I, an applicable policyholder that owns one or more employer-owned life insurance contracts issued after the section’s enactment (it was added by Pub. L. 109-280 on August 17, 2006) must file a return for each year those contracts are owned, showing, among other items, that it has a valid consent for each insured employee (or, if not all consents were obtained, the number of insured employees without one). Separately, any applicable policyholder owning such contracts during a year must keep the records needed to determine whether the requirements of that section and of IRC § 101(j) are met.

How proceeds and cash value land in the company’s books, and any shareholder basis, depends on the facts and the company’s records. A CPA’s view helps coordinate that with the policy decision, though no particular tax result is promised.

Why NR CPAs & Business Advisors Covers This Planning

NR CPAs & Business Advisors is a Miami CPA firm. It serves families, professionals, and business owners across the United States, including Indian-American households and business owners.

The firm pairs a CPA’s view of tax and cash flow with the insurance decision. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice. The firm offers no rebates or inducements to buy a policy.

The firm’s insurance work covers key person life insurance, buy-sell agreement insurance, term life insurance, whole life insurance, estate planning life insurance, and NRI life insurance. For an S corp, the policy and the company’s books are reviewed together.

Frequently Asked Questions

Short answers to common questions about key person insurance for S corp owners are below.

Are the death benefits taxable?

Next Step: Set Up a Coverage Review

If a co-owner’s health has changed, or a key employee is retiring, the decision may feel urgent. You don’t have to sort through key person insurance for S corp owners alone. Our team can review your company’s ownership and key person exposure with you, and Nischay Rawal can answer the insurance questions. Please request a coverage review and call us today to help protect your loved ones and the company’s future.