Key Person Insurance for Your Single-Owner Company

Key person insurance for a single owner company is a life insurance policy the business buys on the owner’s life. If the owner dies, the company receives the death benefit. This matters most when one person holds the clients, the pricing and the daily work. This page explains how the policy works, who owns it, and where its limits are. Insurance is offered by the licensed agent, separately from the accounting practice.

What Key Person Insurance Is and Who It Fits

Key person insurance is a life insurance policy a company buys on a person whose death would cause it financial harm. The company owns the policy, pays the premiums and receives the benefit. The Insurance Information Institute describes it as a way to compensate a business for financial losses caused by the death or disability of a key employee.

A single-owner company is the clearest case. One owner often holds the client relationships, sets prices, manages licenses and runs daily operations. If that owner dies, no one else is ready to step in. Bills keep coming while revenue may slow.

A business with two or more owners has another path. A co-owner can keep work moving, and a buy-sell agreement can set how an owner’s share changes hands. A sole owner has no such partner, so the planning question looks different.

The insured person is usually the owner. The same structure can also cover another essential person, such as a manager the company cannot easily replace. Florida law ties a business’s insurable interest in a key person to written consent obtained before the insurance is bought, under Fla. Stat. § 627.404.

What the Policy Covers and How the Proceeds Can Be Used

The policy pays a death benefit to the company when the covered person dies while the policy is in force. The company decides how to use the money. The policy does not require any specific use.

Companies often apply the proceeds to:

• Covering lost revenue during the transition period
• Funding the search for a replacement or an interim manager
• Paying business debts and obligations
• Steadying cash flow while clients and staff adjust

The benefit amount comes from the policy terms and the underwriting process. No formula on this page sets or promises that amount.

Taxes are a separate question. Under 26 U.S.C. § 101, gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured. Not every amount is excluded: for an employer-owned life insurance contract, the exclusion is limited to the premiums and other amounts paid by the policyholder for the contract, unless the notice and consent requirements are met and one of the listed exceptions applies. The transfer-for-valuable-consideration limit applies when a life insurance contract or any interest in it is transferred for a valuable consideration: the excluded amount can’t exceed the actual value of the consideration plus the premiums and other amounts the transferee pays afterward. The limit doesn’t apply if the transferee’s basis is determined in whole or in part by reference to the transferor’s basis, unless the transfer is a reportable policy sale. Estate tax is a different rule. Under 26 U.S.C. § 2042, proceeds can count in the gross estate depending on who held ownership rights at death.

Ownership, Premiums, and Beneficiary Setup

In the typical setup, the company is the owner, the payer and the beneficiary. The insured owner is the person whose life is covered. Each role should be written down in the policy paperwork.

The company pays the premiums, so the cash flow effect belongs in the planning conversation. Plan for that cost in your budget.

The setup also decides who controls the policy and who gets the money. If the owner leaves, retires or sells, the ownership and beneficiary designations shape what happens next. Review them before the policy is issued, not after.

Consent matters too. Under Florida law, the proposed insured’s signature on the application counts as written consent. Tax treatment depends on the facts of your company and your policy, so review those with your CPA and the policy terms before you decide.

How the Process Works, Step by Step

The process starts with a coverage review, a first meeting to look at how the owner’s role, revenue and obligations connect to the company’s finances. Bring recent financial statements and a list of the owner’s responsibilities.

1. Coverage review. We look at the owner’s role and the company’s finances together.
2. Information gathering. We collect the company’s financial picture and the owner’s health history.
3. Application. Health questions are required, and issue may depend on insurability.
4. Underwriting. The insurer reviews the application and may ask for more information before it issues a policy.
5. Policy delivery. We review ownership, beneficiary and premium arrangements with you.

Underwriting time varies by insurer and by the facts of each case. This page does not give a set number of days.

Limits and Points to Weigh Before You Buy

Key person insurance pays the company when a covered death occurs under the policy. It does not replace the owner’s skills or guarantee that the business will survive.

Read the exclusions, limitations and the policy’s structure in the policy document. Florida law requires a life policy to be incontestable after 2 years from its date of issue, except for nonpayment of premiums and other listed exceptions, under Fla. Stat. § 627.455. Fla. Stat. § 627.455 reads: “Every insurance contract shall provide that the policy shall be incontestable after it has been in force during the lifetime of the insured for a period of 2 years from its date of issue except for nonpayment of premiums and except, at the option of the insurer, as to provisions relative to benefits in event of disability and as to provisions which grant additional insurance specifically against death by accident or accidental means.” The insurer can still raise defenses based on policy provisions that exclude or restrict coverage, under Fla. Stat. § 627.463.

Other points to check:

• Every life policy in Florida must give the insured a grace period of not less than 30 days for payment of any premium after the first, under Fla. Stat. § 627.453.
• Dividends on a participating whole life policy are not guaranteed.
• Renewability, cancellability and any age-based premium change are set by the specific policy. Confirm them in writing.
• A buy-sell arrangement applies only when there are co-owners.

How NR CPAs Approaches the Coverage Review

NR CPAs & Business Advisors is a Miami CPA firm. It works with families, professionals and business owners across the United States, including Indian-American households and business owners.

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

Our team handles scheduling and document collection. Because our firm is a CPA firm, we look at how premiums, company cash flow and tax reporting fit together in the same review. The insurer for any specific policy is identified in that policy’s materials.

Questions Owners Ask About Single-Owner Key Person Coverage

If your company would struggle without you, or you’re helping an owner in that position, contact NR CPAs & Business Advisors at nrcpas.com/contact to start a coverage review of your situation.