Protect the People and Plans Your Florida Business Depends On

Key Person Insurance Insurable Interest: Who Qualifies and What the Business Must Show

The business must show a real financial stake in that person’s continued life, not just a preference for them.

If you run or co-own a company, this question often comes up after a valued partner has a health scare, leaves, or dies. You may be trying to figure out whether the company can own a policy on someone’s life at all. This page explains the Florida rules in plain words.

Who qualifies as a key person for a business policy, and what insurable interest must the business show?

A key person is usually someone the business cannot easily replace. Florida law lets a business entity hold an insurable interest in the life, body, and health of its owners, directors, officers, partners, managers, key employees, or key persons of the business entity or of any affiliate or subsidiary, when written consent is obtained from the key employees or persons before the insurance is purchased. For this purpose, a key employee or key person is defined by reference to the federal definition in Internal Revenue Code section 101(j)(2)(A)(ii) (Fla. Stat. § 627.404).

Common examples include:

• A top sales leader whose client relationships bring in much of the revenue.
• A licensed or technical professional the business depends on to deliver its work.
• An owner-operator whose daily role keeps the company running.
• A person whose contracts or lender relationships carry a large share of the business.

The business must show more than a good working relationship. The business should be able to explain how that loss would appear in revenue, operations, or lender requirements. Whether the facts support that interest depends on the facts.

What are the elements of insurable interest?

Insurable interest is the stake that lets a policy owner buy coverage on another person’s life. For life, health, or disability insurance, it can be a financial stake, or a close blood or legal relationship with a substantial interest engendered by love and affection. Florida requires that stake to exist when the contract is made. Its test is not only financial.

The key elements are:

1. A financial stake. An individual has an insurable interest in another person if the individual has an expectation of a substantial pecuniary advantage through the continued life, health, and safety of that other person and consequent substantial pecuniary loss by reason of the death, injury, or disability of that other person. A business entity’s interest in its owners, directors, officers, partners, managers, key employees or key persons of the business entity or of any affiliate or subsidiary is governed by a separate rule that requires written consent obtained from the key employees or persons before the insurance is purchased.
2. A possible substantial loss. The business would suffer a substantial financial loss if that person died, was injured, or became disabled.
3. Timing. The interest must exist when the policy is issued. Florida law says it need not exist after coverage begins (Fla. Stat. § 627.404).
4. Written consent. For a business policy, the key employee or key person must give written consent before the insurance is bought (Fla. Stat. § 627.404).

A family tie or friendship alone does not show a business loss. Rules can also differ by insurer and by state, so these points are reviewed during a coverage review.

What does key person insurance cover?

Key person life insurance pays a death benefit to the business when the covered person dies. The Insurance Information Institute describes key person insurance as compensation for financial losses caused by the death or disability of a key employee (Insurance Information Institute). Some policies may also address disability, depending on the policy form.

The business decides how to use the money. Some businesses use it to cover lost revenue, recruit and train a replacement, or meet lender terms. The policy does not promise any particular result for the business.

Three points matter before buying:

• Limitations and exclusions. These come from the insurer’s policy form. Florida law says an incontestable clause does not stop defenses based on provisions that exclude or restrict coverage (Fla. Stat. § 627.463).
• If the age or sex of the insured, or of any other individual considered in determining the premium or benefit, was misstated, Florida law adjusts the benefit to what the premium would have bought at the correct age or sex (Fla. Stat. § 627.456).
• Policy type. Term life insurance and whole life insurance work differently. Ask which generic type fits the business need. A key person policy is not an investment.

Who is the owner and who is the beneficiary on a key person life insurance policy?

Usually, the business owns the policy, pays the premiums, and is named as beneficiary. The key person is the insured. This structure fits the business’s insurable interest, because the business is the party that would bear the financial loss.

Written consent should happen before the policy is issued. Florida law also bars the business from retaliating against a key employee or key person who refuses consent (Fla. Stat. § 627.404). That protection matters for a fair process.

Ownership details matter for estate purposes. Under federal estate tax law, insurance proceeds count in the decedent’s gross estate when they are receivable by the executor. They also count when other beneficiaries receive them and the decedent held incidents of ownership at death (IRC § 2042). Ownership and beneficiary changes, business restructuring, and partner exits should be reviewed as part of a coverage review.

What documentation should a business keep to show insurable interest?

A business should keep records that link the key person to its revenue, contracts, or operations. It should also keep the signed consent. Clear records make the financial loss easier to explain and easier to review.

Practical records often include:

• A written role description for the key person.
• Revenue or contract data showing the person’s role in producing income.
• Financial statements that show the business’s position.
• The policy application and the signed written consent.

Some employer-owned policies face added federal rules. Under those rules, the death benefit of an employer-owned contract can qualify for an exception to the income-inclusion rule when the notice and consent requirements are met and a statutory exception applies, such as one based on the insured’s status or on who receives the proceeds. To meet the notice and consent requirements, the employee must, before issue, receive written notice of the policyholder’s intent to insure his or her life and of the maximum face amount for which the employee could be insured at the time the contract was issued. The employee must also give written consent to being insured under the contract and to coverage that may continue after employment ends, and must be informed in writing that the policyholder will be a beneficiary of any proceeds payable on the employee’s death (IRC § 101). Employer-owned contracts issued after the statute’s enactment also require each applicable policyholder owning them to file a return for each year the contracts are owned, showing the number of employees at year end, the number of those employees insured, the total insurance in force, the policyholder’s name, address and taxpayer identification number, the type of business it conducts, and whether a valid consent exists for each insured employee (or, if not all consents are obtained, the number of insured employees without consent) (IRC § 6039I).

From a CPA’s view, the business should plan how premium payments and any death benefit will be recorded on its books. We cannot promise a specific tax result, so please contact our team to set up a coverage review and discuss these questions with us. Accounting and tax services come from NR CPAs & Business Advisors. Insurance is offered by the licensed agent, separately from the accounting practice.

Next steps if you are reviewing a key person policy for your business

If you are reviewing a key person policy, start by talking through the facts with our team.

On this page, Nischay Rawal is acting as a licensed insurance agent, separately from the firm’s accounting practice; call us today to confirm the states in which he holds an insurance license. A coverage review looks at the insurable interest facts, the insurer’s policy form, and the business’s tax and cash flow picture.

For the broader picture, read our key person insurance guide.

Frequently asked questions