Key Person Insurance for Foreign-Owned US Companies

Key person insurance for a foreign-owned company is a business-owned life insurance policy on someone the company relies on. Ownership structure decides who owns the policy, who pays the premiums, who receives the benefit, and who signs the application.

NR CPAs & Business Advisors is a Miami CPA firm. We help owners across the United States, including Indian-American and NRI owners in Florida, review life insurance with a CPA’s view of tax and cash flow. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice.

What Key Person Insurance Is and Who It Fits

Key person insurance is life insurance a business buys on a person whose death would cause it financial harm. A key person can be an owner, director, officer, partner, manager, or key employee, meaning an individual whose position or compensation is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code of 1986.

The company pays the premiums and receives the death benefit. The Insurance Information Institute explains that this coverage compensates a business for financial losses caused by the death or disability of a key employee.

Foreign-owned U.S. companies often ask about this coverage. Common cases include:

• A U.S. subsidiary of an overseas parent company
• A U.S. company with foreign shareholders
• A U.S. LLC with a foreign member
• A company whose key person is an NRI or non-citizen

The coverage is usually written as a whole life insurance policy or a term life insurance policy. It is insurance, not an investment or a savings plan. Each insurer sets its own rules for who it will insure.

Insurable Interest: Why the Company Can Usually Insure a Key Person

A company can usually insure a key person when it has an insurable interest in that person’s life. For a business, insurable interest in the life of a director, officer, or employee is a matter of state insurance law; in Florida, it is addressed by Fla. Stat. § 627.404(2)(b)9. IRC § 101 also has a separate rule, titled ‘Exception for business-related policies,’ within its provisions on accelerated death benefits. That rule does not define insurable interest, and it does not remove the general death-benefit exclusion in § 101(a)(1). Florida law sets specific conditions for businesses. Florida law sets specific conditions for businesses.

Under Fla. Stat. § 627.404, a business entity can include a corporation, partnership, LLC, or business trust. The business may insure its owners, directors, officers, partners, and managers, or its key employees or key persons, and those of any affiliate or subsidiary, if written consent is obtained before the policy is bought. The key person must consent in writing before the policy is bought.

If a key person refuses consent, the company may not retaliate or take adverse action against that person.

Typical financial stakes include lost revenue, lender or contract exposure, and the cost of finding a replacement. Keep records that show these stakes, because an insurer may ask for them.

A personal policy works differently. A policy on another person’s life must pay the benefit to the insured, the insured’s personal representative, or someone with an insurable interest when the contract is made. The statute says that interest need not last after coverage begins.

How Foreign Ownership Changes Who Owns, Pays and Receives the Policy

In most foreign-owned structures, the U.S. company owns the policy, pays the premiums, and receives the death benefit. The company’s governing documents still control the final roles.

• U.S. corporation owned by a foreign parent. The company usually owns and pays for the policy. The parent may need to approve the purchase under its own governance.
• U.S. company with foreign shareholders. Shareholder agreements set who votes and decides. Under Fla. Stat. § 607.0732, the existence of a shareholder agreement authorized by that section, such as one that eliminates or limits the board of directors, must be noted conspicuously on share certificates or the information statement for uncertified shares.
• Policy roles should match the operating agreement.

Check the death benefit path before you apply. The business should receive the benefit if the policy is meant to fund the company. Ownership changes later can affect the policy, so review them before any transfer.

Who Signs the Application and What Each Signer Confirms

The company usually signs as applicant and owner, through an officer authorized under its own documents. The key person signs consent and health answers personally.

• Applicant and owner: the company, through an authorized officer.
• Insured key person: the person whose life is covered by the contract. Florida law requires this person’s written consent.
• Beneficiary: usually the company, as named on the application.

This requirement does not apply to a policy of prepaid funeral contract, group life insurance, or group or blanket accident, health, or disability insurance. This applies on or before the contract is made. Group life insurance, prepaid funeral contracts, and group or blanket accident, health, or disability insurance are exceptions to the consent rule, per Fla. Stat. § 627.404. 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.”

Expect the insurer to ask for corporate resolutions, ownership information, and identification. Each insurer sets its own list, so ask for it early. The insured should review every health question personally before signing.

Underwriting for Foreign-National and NRI Key People

Underwriting is the insurer’s review of health, age, occupation, and other facts. It decides whether to issue a policy and on what terms.

Citizenship, country of residence, and travel history can change the questions asked and the paperwork requested. They can also affect which insurers will consider the case.

A fully underwritten policy includes health questions. Issue and terms may depend on insurability. A key person who lives abroad may need medical records from foreign providers, which can lengthen the timeline.

Start the paperwork early, especially when a lender or co-owner is waiting.

Tax Treatment: What a CPA Reviews With the Coverage Decision

Death benefits are generally not taxable income under federal law, but exceptions and business rules add conditions.

Under 26 U.S.C. § 101, amounts paid because of the insured’s death are generally excluded from gross income. Interest on proceeds the insurer holds can be taxable.

When a company owns a policy on an employee and collects the benefit, the tax-free amount under IRC § 101(j) is generally capped at the premiums and other amounts the company paid for the contract. The cap is lifted only when the written notice and consent requirements are met and one of the statute’s listed exceptions also applies. Examples include an insured who was a director when the contract was issued, or an amount paid to the insured’s family member, designated beneficiary, trust or estate. The employee must be notified in writing of the intent to insure and the maximum face amount. The employee must give written consent. The employee must also be told in writing that the company will be a beneficiary.

Premium deductions are a separate question. Federal rules under 26 U.S.C. § 264 limit deductions tied to life insurance and certain borrowing. The answer turns on the policy and the company’s tax position.

Our accounting team reviews how the premium and benefit are recorded on the company’s books and returns. That review stays separate from insurance sales.

What to Expect: Steps for a Coverage Review

A coverage review starts with the company’s ownership chart and the reason for the coverage. It then moves to the application and underwriting steps.

1. Share the ownership chart. Include the key person’s role and why coverage is being considered, such as a lender or co-owner request.
2. Review policy options. Nischay Rawal, a licensed insurance agent, reviews whole life, term, key person, and buy-sell options against the company’s facts.
3. Gather company documents. Governing documents, resolutions, and identification are typically needed. The insurer sets the final list.
4. Complete health questions. The key person answers the health questions. The insurer then issues or declines the policy under its underwriting rules.

Florida law bars anyone from acting as an insurance agent unless licensed and appointed, per Fla. Stat. § 626.112.

Florida law also requires a CPA firm that accepts a commission to disclose it to the client in writing, per Fla. Stat. § 473.3205. A CPA firm that accepts a commission for the sale of a product or service to a client must disclose that fact to the client in writing, as Florida law requires.

Timing varies with the insurer and the paperwork.

Frequently Asked Questions