Key Person Insurance With a Health Condition: Planning for Your Florida Business

Key Person Insurance With a Health Condition: What to Expect

Key person insurance with a health condition needs more planning. A health condition changes the application process, not only the premium. Health questions are required, and issue may depend on insurability.

Key person insurance is a policy a business owns on an owner or employee. If that person dies or becomes disabled, the policy can help the business cover the financial loss. The Insurance Information Institute describes it this way. This page explains how underwriting works, what anxiety and other conditions can mean, and what to gather before a coverage review.

What a Health Condition Means for Key Person Coverage

A health condition in a key person changes the application process. The insurer reviews that person’s health even though the business applies.

In most key person cases, the business is the applicant and policy owner. The insured person is the one the insurer evaluates. So the key person’s medical history becomes part of the file.

Florida law sets the rules for who may be insured. Under Fla. Stat. § 627.404, a business entity has an insurable interest in the life, body, and health of its owners, directors, officers, partners, managers, key employees and key persons, and of those of any affiliate or subsidiary, if those individuals consent in writing before the insurance is purchased. The statute also bars a business from retaliating against a key person who refuses consent.

Keep two questions apart. Insurable interest is a legal question about the business’s financial stake. Underwriting is the insurer’s health and risk review. A business can have the right to buy coverage and still face a health review that changes the terms.

Health Questions Come First: How Underwriting Works

A fully underwritten key person policy starts with health questions on the application. The insurer reviews the answers and any records it asks for. Then it decides what to offer.

Typical outcomes include:

• Standard rating. The insurer offers coverage in its usual rate class.
• Rated offer. The insurer offers coverage at a higher premium or with added terms.
• Modified policy. The insurer offers different benefits or terms.
• Declined application. The insurer does not offer coverage.

The insurer makes that decision, not the agent. In plain words, “issue” means the insurer agrees to write the policy. “Rating” is the risk class the insurer assigns, and it helps set the price. No policy is described here as issued before underwriting is complete.

The NAIC Life Insurance Buyer’s Guide, published by state insurance regulators, covers questions to ask before buying life insurance. It is a useful companion to the review process described here.

Does a Pre-Existing Condition Stop Coverage? Anxiety and Other Conditions

An insurer does not decide based on a condition’s name alone. It reviews the diagnosis, treatment, medication and history of any condition disclosed. Anxiety may affect issue or rating, depending on those details and the insurer’s underwriting guidelines.

We can’t predict the result for any key person. Two people with the same diagnosis can have very different treatment histories. That difference can matter.

Answer every health question fully and accurately. Misstatements can affect whether a claim is paid, so don’t guess. Florida law also makes a policy incontestable once it has been in force during the insured’s lifetime for 2 years from its date of issue, with exceptions. Those exceptions include nonpayment of premiums, under Fla. Stat. § 627.455.

Who Can Be Insured Under Key Person Coverage

Many businesses consider key person insurance when a particular owner, executive or employee is important to the company’s continued operation. A person the business has no financial stake in generally does not qualify.

Written consent comes first. Florida’s rules under Fla. Stat. § 627.404 require it before the policy is bought.

Federal law adds a reporting duty for employer-owned policies. Under 26 U.S.C. § 6039I, an applicable policyholder that owns employer-owned life insurance contracts issued after the statute’s enactment must file a yearly return. That return shows whether it has valid consent for each insured employee.

If the key person has a health condition, the business’s ability to insure that person still depends on whether the key person falls within the categories the statute describes and has consented in writing before the policy is purchased. Health is reviewed by the insurer during underwriting. Eligibility rules and insurer requirements are reviewed at a coverage review.

Key Person Disability Coverage When Health Changes

Key person disability coverage pays the business a benefit if the key person becomes disabled and cannot work, as the policy defines disability.

It is a separate question from life coverage. Disability coverage has its own health questions, its own definition of disability, and its own waiting period. The waiting period is the time before benefits begin. A condition that matters for life coverage may affect disability terms in a different way. The policy’s exact definitions control.

Ask these questions before you apply:

• What counts as disability under this policy?
• When does the benefit begin, and how long does it run?
• Does the health review differ between the life and disability parts?

A life policy pays on death. A disability policy pays based on how it defines disability, which may differ from the diagnosis itself. Keep that difference in mind when you talk with the agent.

Options a Coverage Review May Examine

A coverage review looks at term and whole life options. It also looks at buy-sell funding, measured against the business’s needs.

Term and whole life key person policies differ in length of coverage, cost structure and cash value. Whole life policies build cash value, and policy loans can reduce the benefit paid. The Florida Department of Financial Services life insurance guide explains cash value, policy loans and replacement in plain language.

Buy-sell funding can come under pressure when an owner’s health changes. If the agreement must be funded with insurance, timing matters. An application made while health is stable reflects health at that time. A later application reviews health at that later date. See our buy-sell agreement insurance page for more on funding.

Replacing an existing policy needs care. Florida requires an agent who recommends surrendering a cash value life policy, without recommending that the proceeds fund or purchase another annuity or life insurance policy, to give written information first, under Fla. Stat. § 627.4553. That information includes, but is not limited to, estimated surrender charges, possible tax consequences and any forfeited death benefit, under Fla. Stat. § 627.4553, which applies when an agent recommends surrendering an annuity or cash value life policy and does not recommend using the proceeds to buy another one.

What to Gather Before a Coverage Review

Bring the key person’s role, the business’s need for coverage, and any health facts the application will ask about. Having these ready helps the review start with usable information.

Business facts to collect:

• The key person’s role, duties and responsibilities
• Ownership percentage, if the key person is an owner
• Why the business would lose money, such as loans, client ties or revenue the person brings in
• Any existing policies, with their terms and beneficiaries

Health facts to collect:

• Diagnoses, with approximate dates
• Treating clinicians and how to reach them
• Current medications
• Recent test results

Answer every application health question in full and accurately. Ask the agent what the insurer’s underwriting needs for the specific condition.

How Our Team Approaches These Questions

Nischay Rawal is the responsible licensed insurance agent for this page. Insurance is offered by the licensed agent, separately from our accounting practice.

Our team is the firm’s accounting and advisory group. We bring a CPA’s view of tax and cash flow to insurance planning.

Compensation needs clear disclosure.

You can check any agent’s license through the Florida Department of Financial Services.

Bring Your Key Person’s Situation to a Coverage Review

A key person with a recent diagnosis, or a change in health, raises questions the business should answer early. The same is true when an owner’s buy-sell funding depends on coverage not yet applied for. Those facts shape what the insurer will ask and what it may offer.

Contact our office through our contact page to set up a coverage review. Bring the facts listed above so we can work through what the business needs first.

Frequently asked questions