Plan Ahead for the People Your Franchise Depends On

A franchise owner with several locations often relies on one general manager or operator. If that person died or could no longer work, payroll, loans and franchise duties could all feel the strain at once. Key person insurance for franchise owners is built to address that gap.

Key person insurance is life insurance that a business owns on someone it depends on. The business is the beneficiary and decides how to use the death benefit. The right amount and ownership come from your own numbers, which is what a coverage review sets.

What Key Person Insurance Is and Who It Fits

Key person insurance is a policy a business buys on the life of an individual whose work the business relies on. The Insurance Information Institute describes it as coverage a business can use to offset financial losses from a key employee’s death or disability.

It fits best when one person’s role reaches beyond a single site. Common examples include:

• A franchisee whose general manager oversees two or more units, staff and vendors.
• An owner whose lender ties loan terms to a specific operator.
• A franchise agreement that depends on a named person’s management role.
• A business whose operating partner handles the franchisor relationship.

Nischay Rawal, a licensed insurance agent, offers this coverage. It is offered separately from the firm’s accounting practice.

What the Policy Covers and What Is Included

The policy pays a death benefit to the business. The business decides how to use it, within the policy terms.

Common uses include:

• Recruiting and paying a replacement operator.
• Covering interim management while a search runs.
• Making loan or lease payments during a transition.
• Covering payroll gaps at affected locations.

Two generic policy types are most common. FINRA explains that term life insurance covers a limited period. Whole life insurance covers a lifetime and includes a cash-value feature. Policy values depend on the contract’s terms.

A coverage review checks these details in writing:

• The insurer and the policy form number.
• The face amount and any planned change to it.
• The premium and how long premiums are payable.
• Limits and exclusions.
• Renewability, cancellation rights and any age-based premium change.

Health questions are required, and issue may depend on insurability.

Sizing Coverage to Revenue and Franchise Obligations

Size the amount from the figures that depend on the operator, not from a fixed salary multiple. Start with a simple worksheet:

• Revenue and profit for each location, and how much depends on the operator’s direct oversight.
• The cost of replacing that role with an outside hire, including search time and training.
• Obligations tied to the person, such as franchise performance and transfer terms, loan covenants, personal guarantees, lease commitments and payroll during a transition.

Compare the total exposure with what the business could cover from its own resources. That comparison frames the coverage amount. The review records the reasoning in writing.

Revisit the figures when you add a location or change the operator’s role. Coverage set for two sites may not fit five.

Ownership, Beneficiary and Tax Questions: The CPA View

In the usual structure, the business applies for, owns and is the beneficiary of the policy. The insured person must agree first. A business entity may not retaliate or take adverse action against a key employee or key person who does not consent to the issuance of insurance on that person’s life. Florida’s insurable-interest and written-consent rules are set out in Fla. Stat. § 627.404.

From a CPA’s view, several federal rules shape the numbers. IRC § 264 bars a deduction for premiums when the taxpayer is directly or indirectly a beneficiary, and the statute lists specific exceptions. Under IRC § 101, death benefits are generally excluded from gross income. Whether life insurance proceeds are taxable depends on the facts of each situation.

Ownership also matters for estate tax. A policy the operator owns personally can raise a different question than one the business owns.

If the business owns one or more employer-owned life insurance contracts issued after the date of the enactment of this section, IRC § 6039I requires it to file a return and keep records, including whether a valid consent exists for each insured employee. Owners with foreign-resident shareholders or beneficiaries face extra questions, which the review covers.

How the Coverage Review Works, Step by Step

A coverage review moves through five steps, from first contact to policy issue.

1. Initial contact. Describe the business, the locations and the operator’s role.
2. Document gathering. Provide the franchise agreement, loan and lease documents, location financial statements and the organization chart.
3. Coverage review meeting. Nischay Rawal discusses amount, ownership, beneficiary and policy type with you.
4. Written summary. You receive the recommended amount and ownership in writing. Any fee for the coverage review is disclosed in writing before it begins.
5. Application and underwriting. You answer health questions, the insurer underwrites the file and the policy is issued. Timing depends on underwriting and carrier requirements, and the insurer is named in every policy discussed.

Why NR CPAs & Business Advisors

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

The firm’s offerings include:

• Key person insurance
• Buy-sell agreement insurance
• Estate planning life insurance
• NRI life insurance
• Term life and whole life insurance

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

If the firm accepts a commission for the sale of a product or service to a client, Fla. Stat. § 473.3205 requires the firm to disclose that fact to the client in writing, in accordance with rules adopted by the Florida Board of Accountancy. Florida also requires that anyone acting as an insurance agent be licensed and appointed, under Fla. Stat. § 626.112.

Questions Business Owners Ask Before Buying

If one operator runs several of your locations and your franchise agreement or loans depend on that person, contact NR CPAs & Business Advisors to set the amount and ownership in a coverage review.