Protect the business your shareholders depend on

Key person insurance with Indian shareholders starts with two questions: who owns the business, and where do those owners live? A key person policy is a life insurance policy a company owns on an owner or employee whose death would hurt the business. When shareholders have ties to India or hold NRI status (non-resident Indian), ownership, consent and tax questions need planning before anyone buys. NR CPAs & Business Advisors is a CPA firm in Miami. 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 a life policy that a business owns on a key owner or employee. The business pays the premiums and receives the death benefit. The money helps the company cover a loss if that person dies.

Companies typically use the benefit to:

• Replace income lost while the business rebuilds
• Pay recruiting and training costs for a replacement
• Reassure lenders or investors who rely on that person

Closely held companies, professional practices and founder-led firms often discuss this coverage. The Insurance Information Institute explains that key person life insurance compensates a business for losses caused by a key employee’s death or disability.

Two generic policy types come up most. Term life insurance covers a set number of years. Whole life insurance lasts for the insured’s life and builds cash value. The NAIC Life Insurance Buyer’s Guide compares term and permanent coverage. The Florida Department of Financial Services guide describes cash value and policy loans. Whole life is a life insurance policy, not an investment plan.

Why Indian shareholders change the planning

Key person insurance with Indian shareholders follows the same basic rules as any policy. The facts about residence and citizenship add extra steps. Start with these questions:

• Where does each shareholder live now?
• What is each shareholder’s citizenship and residency?
• Which country’s rules may reach the company, the policy and any payout?

Paperwork needs extra care for shareholders abroad. Identity documents, signatures and beneficiary forms must meet the insurer’s requirements. Consent forms need to be signed on time, so gather them early.

Federal estate tax also depends on residence and citizenship. Under 26 U.S.C. § 2105(a), insurance on the life of a nonresident who is not a U.S. citizen is not treated as property within the United States for that tax. The facts drive the result. NRI life insurance is one of the practice areas this firm handles, and a coverage review can sort out these facts first.

Who owns, insures and receives the benefit

In most key person cases, the company owns the policy, pays the premiums and is the beneficiary. The key person is the insured. Each role can point to a different person or entity, so decide them on purpose.

Florida law sets the consent rule. A business can have an insurable interest in its owners, directors, officers, partners, managers, key employees or key persons, and those of any affiliate or subsidiary, if each one consents in writing before the policy is bought. The business may not punish a key person who refuses. See Fla. Stat. § 627.404.

Your shareholder agreement matters too. Under Fla. Stat. § 607.0732, a shareholder agreement that follows the section is effective among the shareholders and the corporation. Its existence must be noted conspicuously on each share certificate or on the required information statement, though failing to note it does not affect the agreement’s validity.

Federal reporting can also apply. Under 26 U.S.C. § 6039I, an applicable policyholder owning 1 or more employer-owned life insurance contracts issued after the date of the enactment of this section must file a return. The return shows whether valid consent was obtained for each insured employee.

Ownership choice affects who controls the policy and how proceeds get used. Review that choice with your attorney and the company’s CPA before you sign.

Who may not qualify and what underwriting asks

Eligibility depends on three things: an insurable interest, written consent and the insurer’s underwriting decision. Owning shares alone does not settle any of them.

• Insurable interest. The business needs a legal interest in the person it insures. Under Fla. Stat. § 627.404, that interest does not have to last after coverage starts.
• Consent. The insured must consent in writing on or before the contract is made. 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.”
• Underwriting. The insurer reviews the application. Health questions are required, and issue may depend on insurability.

Underwriters often ask for company financial statements, the key person’s role and pay, and ownership records with the shareholder agreement. Some applications are declined or offered on different terms. We walk through the reasons with the owner before any decision.

How the process runs from coverage review to issue

The process moves through a coverage review, a need analysis, underwriting and policy delivery. Timing depends on the insurer’s underwriting, so no fixed date applies.

1. Coverage review. This first meeting maps ownership, the key person’s role and the company’s loss exposure.
2. Need and funding. Using the owner’s figures, we estimate a coverage amount. We show guaranteed and non-guaranteed values apart.
3. Application and underwriting. You answer health questions and complete any medical requirements the insurer sets. The insurer makes the decision.
4. Policy delivery. Under Fla. Stat. § 627.455, a life policy must become incontestable after it has been in force during the insured’s lifetime for two years from its date of issue. Plainly, the insurer generally loses its right to contest the policy after that. Unpaid premiums are one exception. Also, at the option of the insurer, provisions relative to benefits in event of disability and provisions which grant additional insurance specifically against death by accident or accidental means are excepted.
5. Engagement. Insurance is offered by a licensed agent, separately from the accounting practice. Where a commission applies, the firm discloses that fact to the client in writing, as Florida law requires.

Tax, cash flow and buy-sell links

The death benefit is generally excluded from income tax, but ownership and payment details can change the result. Under 26 U.S.C. § 101(a), gross income does not include amounts received under a life insurance contract if such amounts are paid by reason of the death of the insured. For an employer-owned life insurance contract, however, § 101(j) limits the amount an applicable policyholder can exclude to the sum of the premiums and other amounts paid by the policyholder for the contract, subject to the exceptions in § 101(j), which apply only if its notice and consent requirements are met. Transfers of a policy can change that result, so ownership changes need a review.

Premiums are a steady cost. Build a premium budget that fits payroll, loan payments and other company obligations. Some owners spread payments over time. The coverage review tests whether that plan works for the business.

A buy-sell agreement sets what happens to a shareholder’s shares at death or exit. Buy-sell agreement insurance can provide cash for that purchase. Key person coverage protects the business against the loss itself. Many owners need both, so review them together. We look at these points from a CPA’s view and coordinate with the owner’s tax advisor.

Common questions and a next step

Most answers depend on ownership, residency and underwriting. A coverage review is the place to sort them out.