Your Bank Wants Key Person Life Insurance? Here Is What to Know

What Key Person Life Insurance Is and Who It Is For

Key person life insurance is a life policy that a business owns on the life of someone whose loss would hurt the company’s finances. It is also called key employee life insurance. The business pays the premiums and is named as beneficiary.

Key persons are usually owners, senior managers, or people whose skills or client relationships the company depends on. Florida law allows a business to obtain this coverage on owners, directors, officers, partners, and managers of the business or of its affiliates or subsidiaries, and on key employees or key persons, if consent is obtained in writing before the insurance is purchased. The key employee or key person must consent in writing before the policy is bought, and the business may not retaliate if that person says no (Fla. Stat. § 627.404).

This page is for business owners in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa, and Jacksonville. It is also for Indian-American business owners who have received the same lender request. Nischay Rawal is a licensed insurance agent and the responsible agent for this page. Insurance is offered by the licensed agent, separately from the accounting practice of NR CPAs & Business Advisors.

Why Banks Ask for Key Person Coverage

A bank may require key person life insurance when repayment seems tied to one person’s continued work in the business. Lenders look at who runs the company, who holds key client relationships, and what would happen if that person died.

The requirement usually sits in the loan documents as a key person covenant. The covenant may require the business to keep coverage on the named person while the loan is open.

The bank sets the loan terms, the coverage amount it wants, and the conditions. The insurer sets the policy terms and underwriting. Read the loan documents closely so you know which rules come from which party.

How a Collateral Assignment Works

A collateral assignment is a way to give the lender a claim on the policy as backup for the loan. The policy owner signs over certain rights in the policy to the lender. The exact rights come from the loan documents and the insurer’s forms.

An assignment does not turn the policy into a loan product. It does not set the interest rate or the repayment schedule. Those terms come from the lender.

Personal guarantees and covenant wording live in the loan documents, not in the insurance policy. How any proceeds above the loan balance are handled depends on the assignment wording and the beneficiary designation.

What the Lender Typically Needs to See

Lenders usually want proof that the policy exists, who owns it, who the beneficiary is, and that premiums are current. Your lender’s document list controls what you must submit. Most files include:

• The insurer’s name, the policy form number, the type of plan, the face amount, and the premium amount and payment schedule.
• Owner and beneficiary designations.
• The assignment form and any insurer acknowledgment the loan requires.
• Proof the policy is in force and premiums are paid.
• Any ongoing reports the lender requests during the loan term.

What the Policy Covers and What It Does Not

A key person policy pays a death benefit to the named beneficiary if the insured dies while the policy is in force, under its terms. Coverage is not automatic for every loss, so review the policy’s limits and exclusions.

Florida rules shape several key protections:

• Incontestability: Every policy must become incontestable after it has been in force for 2 years from its date of issue. The rule has exceptions, including nonpayment of premiums (Fla. Stat. § 627.455).
• Grace period: The insured gets at least 30 days to pay a premium after the first. The policy stays in force during that time, and the insurer may charge interest of up to 8 percent per year (Fla. Stat. § 627.453).
• Underwriting: A fully underwritten policy asks health questions. Issue may depend on the insured’s health history.
• Whole life values: Dividends are not guaranteed. Guaranteed and non-guaranteed values should be reviewed separately.

Tax rules matter too. Death proceeds are generally excluded from gross income, with exceptions such as certain transfers for value (26 U.S.C. § 101). Estate inclusion is a separate question. Proceeds can count in the gross estate, to the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent, when the decedent held incidents of ownership at death, exercisable alone or together with another person; a reversionary interest counts only if it exceeded 5 percent of the policy’s value immediately before death (26 U.S.C. § 2042).

How the Process Works, Step by Step

The process moves through five steps. The lender’s timeline and the insurer’s underwriting set the pace.

1. Share the loan requirement. Send the key person clause, the required coverage amount, and the lender’s document list.
2. Coverage review. Our team reviews the insured, the policy type, and how the assignment fits the loan.
3. Application and underwriting. You answer health questions. The insurer may request medical information.
4. Issue and assignment. The policy is issued, assigned to the lender, and the documents go into the loan file.
5. Ongoing duties. Premiums must be paid on time, and the business keeps the reports the lender requests.

Timelines vary with the lender’s process and the insurer’s underwriting.

Why Work With NR CPAs & Business Advisors

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals, and business owners choose and buy life insurance, with a CPA’s view of tax and cash flow. That view helps you weigh a policy’s cost against the business’s budget.

Nischay Rawal is this page’s responsible licensed insurance agent. You can check an agent’s license through the Florida Department of Financial Services life insurance overview. Insurance is offered separately from the firm’s accounting practice.

If the firm receives a commission on a policy, Florida law requires written disclosure to the client (Fla. Stat. § 473.3205). Our team uses “our team” to describe the firm’s staff and makes no claims about how many agents it has.

Common Questions About Lender Key Person Requirements

Talk With Our Team About Your Loan’s Key Person Requirement

If your bank has asked for key person coverage on an owner or senior manager, you may be facing questions about which policy fits, who must own it, and what paperwork the bank expects. Our team can walk through those points with you. Contact NR CPAs & Business Advisors to set up a coverage review.