Protect the Business You Built Together

Key person insurance is a life insurance policy a business may buy on its owners, directors, officers, partners, managers or key employees only if consent is obtained in writing from those people before the insurance is purchased. The company applies for the policy and receives the benefit. When some shareholders live abroad, ownership records come first, and they shape every policy choice after that.

This page explains the basics for founders, co-owners and family members researching key person insurance for NRI shareholders. It covers what the policy includes, what to gather and how the process runs.

What key person insurance is and who it is for

Key person insurance is life insurance that a company may own on its owners, directors, officers, partners, and managers, or on a key employee or key person, if consent is obtained in writing from the key employee or person before the insurance is purchased. If that person dies, the company receives the benefit to help cover the financial loss. The Insurance Information Institute explains that key person life insurance compensates a business for losses caused by a key employee’s death or disability.

The key person can be a founder, a majority owner, a senior executive, or someone whose skills, client relationships or licenses the business relies on.

Most readers of this page are working through a change. An owner may be moving abroad. A partner may be stepping back. A family member may be trying to understand what the company already holds.

Each policy is usually a term life insurance or whole life insurance policy. A named insurer issues it, and that insurer’s name appears in the policy documents.

Key person insurance for NRI shareholders: why ownership comes first

When some shareholders are NRIs or live outside the United States, ownership questions come before any policy choice. Ownership sets who needs coverage, who owns each policy and who gets paid.

Founder-led companies often spread ownership across borders. A founder may hold most of the shares while relatives or partners in another country hold the rest. That raises questions such as:

• Who holds each share, and where does each holder live?
• Who makes decisions if the founder dies or cannot work?
• How would a departing shareholder’s interest be valued and bought?
• Who owns each policy, pays for it and receives the benefit?

Residence and nationality can affect the application, the documents an insurer asks for and how the insurer communicates. The details depend on the facts of each company.

The Florida insurable interest statute limits who can buy coverage on another person. A business may insure an owner, director, officer or key employee when that person consents in writing before the policy is bought. The business may not retaliate against a key employee who refuses consent.

Before a coverage review, gather these documents:

• The shareholder register
• The shareholder or operating agreement
• Recent financial statements
• A short description of each key role
• Any life insurance the company already holds on owners or key people

What the coverage includes

Each policy names an insured person, a policy owner, a beneficiary, a face amount and a premium schedule. The contract sets these terms, and they control the coverage.

The face amount is the death benefit, the amount paid when the insured dies. Term life insurance covers a set period. When that period ends, the renewal, conversion or lapse terms in the policy apply as written.

Whole life insurance is permanent coverage. It can build cash value and may allow policy loans. Dividends are not guaranteed. Read guaranteed and non-guaranteed values separately.

Florida’s policy loan statute requires policies to let an insurer advance a loan, on proper assignment or pledge of the policy, once the policy has cash surrender value and no premium is in default; the policy must also reserve the insurer’s right to defer granting a loan, other than for the payment of any premium to the insurer, for 6 months after application. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” That statute does not apply to term policies or to term insurance benefits provided by riders or supplemental policy provisions.

Florida requires a grace period statute of not less than 30 days to pay a premium after the first.

The incontestability statute provides that a policy is incontestable after it has been in force during the insured’s lifetime for 2 years from its date of issue, except for nonpayment of premiums and certain other provisions the statute identifies. Fla. Stat. § 627.455 reads: “Every insurance contract shall provide that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue except for nonpayment of premiums and except, at the option of the insurer, as to provisions relative to benefits in event of disability and as to provisions which grant additional insurance specifically against death by accident or accidental means.” Under Florida’s exclusions statute, defenses based on policy exclusions can still be raised.

Health questions are required, and issue may depend on insurability. Read the exclusions and limits in the policy before you buy. The NAIC Life Insurance Buyer’s Guide covers the questions to ask before buying.

How buy-sell agreements and estate planning fit in

A buy-sell agreement sets the terms for buying an owner’s shares after a death or another exit. Life insurance can help fund that purchase under the agreed formula.

Buy-sell agreement insurance and key person insurance serve different purposes. A company can hold both, but for a policy on another person’s life, the benefits must be payable to the individual insured or his or her personal representatives, or to any person having, at the time such contract was made, an insurable interest in the individual insured. Mixing them up can leave a buyout unfunded.

Florida’s shareholder agreement statute gives effect to a compliant agreement among the shareholders and the corporation.

Under the federal death benefit rule, death benefits are generally not gross income. Interest paid on proceeds left with the insurer is taxable.

Estate planning life insurance is a policy used alongside a will or trust, as the family’s documents provide. Under the federal gross estate rule, insurance is included in the gross estate when the executor receives it. It is also included when another beneficiary receives it and the decedent held incidents of ownership at death. Who owns the policy can matter as much as who is named as beneficiary.

The firm’s CPAs review tax and cash-flow questions, including how premiums are recorded. Insurance is offered separately by the licensed agent.

How the process works and what to expect

The process starts with a coverage review. It then moves through documents, options, underwriting, delivery and ongoing review.

1. Coverage review. You describe the company, its owners and the reason for coverage. This first meeting is a coverage review.
2. Document gathering. You provide the shareholder register, agreements, financial statements and key role descriptions.
3. Options. We discuss policy type, face amount logic and who owns and pays for each policy.
4. Application and underwriting. You answer the health questions. The insurer decides issue.
5. Delivery and review period. The Florida life insurance guide explains the review period that follows purchase.
6. Ongoing review. When ownership, roles or the company changes, coverage is reviewed so it stays aligned with the agreements.

Why NR CPAs & Business Advisors

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 discusses insurance alongside the tax and cash-flow questions its CPAs review.
• Insurance is offered by Nischay Rawal, who is currently licensed by the department and appointed by an appropriate appointing entity or person to act as an insurance agent. It is offered separately from the accounting practice.
• Agents must be currently licensed by the department and appointed by an appropriate appointing entity or person under the Florida agent licensing statute.
• The firm does not offer rebates, discounted accounting services or other items of value to buy insurance.

Common questions about shareholder and key person coverage