Protect Your Business and the Founder Who Drives It

The short answer: can the company buy key person insurance on an H-1B founder?

Often, yes. Fla. Stat. § 627.404 provides that a business entity has an insurable interest in the life, body, and health of its owners, directors, officers, partners, managers, key employees or key persons if consent is obtained in writing from those key employees or persons before the insurance is purchased. H-1B status alone does not decide the question.

Key person insurance is life insurance that the company owns, pays for and names as beneficiary. According to the Insurance Information Institute, it compensates a business for financial losses caused by the death or disability of a key employee.

Three facts do most of the work. They are the company’s insurable interest, who owns, pays for and receives the policy, and the founder’s ownership stake. Visa status is one more document to keep in the file.

Nischay Rawal is a licensed insurance agent. Insurance is offered through Nischay Rawal, separately from the firm’s accounting practice.

What insurable interest means for a company

Insurable interest is the financial stake that lets a company insure someone’s life. Under Fla. Stat. § 627.404, the insurable-interest tests written for individuals do not by themselves describe a business entity’s interest in the life of an owner or employee; that entity’s interest is governed by a separate provision of the statute. Fla. Stat. § 627.404 provides that an individual has an insurable interest in the life, body, and health of another person to whom the individual is closely related by blood or by law and in whom the individual has a substantial interest engendered by love and affection.

The statute says this interest must exist when the contract is made. Fla. Stat. § 627.404 reads: “Any individual of legal capacity may procure or effect an insurance contract on his or her own life or body for the benefit of any person, but no person shall procure or cause to be procured or effected an insurance contract on the life or body of another individual unless the benefits under such contract are 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. The insurable interest need not exist after the inception date of coverage under the contract.”

For a founder, the losses are usually concrete. Revenue may depend on the founder’s sales relationships or technical work. A bank loan or credit line may depend on the founder staying involved. The company would also pay to recruit and train a replacement.

The coverage amount should match the loss the company can measure. A large policy with no matching loss is hard to justify. Good records make the case: revenue by source, loan agreements with founder-linked terms, and client contracts that name the founder.

Who owns the policy, who pays the premium and who is the beneficiary?

In the common setup, the company is the owner, the premium payer and the beneficiary. The founder is the insured person. The founder signs the application as the person whose life is covered.

Naming the company as beneficiary ties the benefit to the business. The money goes to the company to cover its loss, not to a family member. The roles on the application must match the company’s documents, including corporate resolutions and any buy-sell agreement. A mismatch creates questions later.

Florida law also sets consent rules. A business may have an insurable interest in its owners, officers and key employees when written consent is obtained from those key employees or key persons before the insurance is bought. The statute also says the insured must consent in writing to the contract on or before it is entered into. Under Fla. Stat. § 627.404, an individual life policy (other than group life, prepaid funeral, and certain group or blanket accident, health or disability coverage) may not be carried out unless the insured person, if legally able to contract, applies for it or gives written consent to it and its terms no later than when the contract is made. The statute makes an exception for a minor under age 15: a person with an insurable interest in the child, or a person the child depends on for support, may obtain a policy on the child. The statute also bars the business from retaliating or taking adverse action against any key employee or key person who does not consent.

How the founder’s ownership stake and visa status fit in

Visa status is one fact to document, not the test. Work authorization describes what a person may do in the United States. Insurable interest describes the company’s financial stake in that person’s life. These are separate questions, and the file should answer both.

The ownership stake helps the analysis. A founder who holds a large share is usually a larger financial link to the company. That supports the insurable interest case, but only when the records show the link.

Build the file with these documents: the founder’s ownership records, board or member resolutions approving the policy, a role description showing what the founder does, and a summary of revenue and debt tied to the founder. Keep immigration papers in the file with the same weight as the rest. No single document settles the question.

Premiums, death benefit and cash flow: the CPA view

Premiums are a recurring cash-flow decision. Plan them like other fixed business costs, because they come due every year the policy stays in force. Test the budget across the years the company needs coverage, not only the first year.

According to the IRS, amounts received because of the insured’s death are generally excluded from gross income. The same IRS page says interest paid on proceeds held by the insurer is taxable. That matters if the company leaves proceeds with the insurer.

Borrowing against a policy adds a tax rule. Federal tax law generally disallows deductions for interest on certain debt tied to life insurance policies, with exceptions. For a key person, the exception covers aggregate indebtedness up to $50,000 on that person’s policies. Review any policy loan before the company takes one.

Under Fla. Stat. § 627.404, this section does not apply to any policy of life insurance to which s. 624.402(8) applies.

Term and whole life work differently. According to FINRA, term covers a limited period, while whole life provides lifetime coverage and includes a cash-value feature. The right type matches the length of the loss the company faces.

Documents and questions to settle before applying

Before anyone submits an application, settle a short list. Gather the founder’s ownership percentage, the company’s formation and governance documents, and a list of loans or contracts that depend on the founder. Write down the proposed coverage amount and how you calculated it. Decide who will be owner, payer and beneficiary.

If the company has more than one owner, a buy-sell agreement can use the policy to fund a purchase. Under Fla. Stat. § 607.0732, a shareholder agreement that complies with the section is effective among the shareholders and the corporation. It must either be set forth or referenced in the articles of incorporation or bylaws and approved by all persons who are shareholders at the time of the agreement, or be in a written agreement signed by all persons who are shareholders at the time and made known to the corporation; it is also subject to termination or amendment only by all persons who are shareholders at the time of the termination or amendment, unless the agreement provides otherwise. The coverage should match that document.

The application asks for personal and health information. Issue may depend on insurability, so answer every question fully. Review the plan with the company’s own tax and legal advisers before applying.

Bring the facts to a coverage review

A co-founder, spouse or business partner often asks this question while a business decision is still open. The founder’s work status and ownership both matter, and the cost to the company is not yet clear. That is a hard place to decide from.

Our team can review those facts with you in a coverage review, the first meeting with the firm. We look at ownership, the loss the company faces, the policy roles and how the premium fits cash flow. To get in touch, visit our contact page. Where the firm accepts a commission on a product sold to a client, it discloses that fact to the client in writing.

Frequently asked questions

Often yes, if the company has an insurable interest in the founder as an owner, director, officer, partner, manager or key person, and written consent is obtained from the founder before the insurance is purchased. Visa status alone does not decide it.