Protect your LLC if a key person is lost

Key person insurance for LLC owners works like this: the company applies for the policy, owns it, pays the premiums and is named the beneficiary. Under Florida’s insurable-interest rule for a business entity, a key person is an individual whose position or compensation is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code, and a business may insure its owners, directors, officers, partners, and managers, or its key employees or key persons, if written consent is obtained from them before the insurance is purchased (Fla. Stat. § 627.404). This page explains who does what, what the death benefit can and cannot do, and where tax and consent rules come in.

What key person insurance is and who it fits

Key person insurance is life insurance a business buys on an owner or employee whose work or relationships the company depends on. If that person dies, the death benefit goes to the business, which can use it to bridge the gap.

LLCs often look at this coverage when client relationships, licensing or banking ties rest heavily on one person. It can fit single-member and multi-member LLCs alike.

Key person coverage is not personal life insurance. Personal coverage pays a family. Key person coverage pays the company. Buy-sell agreement insurance is a different tool, built to fund an ownership transfer. Our buy-sell agreement insurance page explains that difference.

Every policy has four roles:

• Policy owner: the party that controls the policy.
• Insured: the person whose life is covered.
• Premium payer: the party that pays the premiums.
• Beneficiary: the party that receives the death benefit.

Who owns, pays and receives the benefit

In the standard structure, the LLC owns the policy, pays the premiums and receives the death benefit. The insured person does not receive the payout.

Florida law lets a business entity, which includes a limited liability company, insure its owners, directors, officers, partners, managers or key employees. The person must consent in writing before the policy is bought. The company also cannot retaliate against someone who says no. Florida insurable interest statute

A co-owner or the insured can hold the policy instead. That choice changes who controls the policy, so it should match the operating agreement.

Federal tax rules add another layer. Under IRC section 101, death benefits are generally excluded from gross income. The company must also file a return under IRC section 6039I stating that it has a valid consent for each insured employee or, if not all consents are obtained, the number of insured employees for whom consent was not obtained.

Interest on debt used to buy life insurance is generally not deductible under IRC section 264. Under IRC § 264(e), the general bar on deducting interest on debt tied to a life insurance policy does not reach interest on debt for policies covering a key person (the statute’s term for officers and 20-percent owners, with a cap on how many individuals a taxpayer may treat as key persons) as long as the total of that debt for policies covering the individual stays at or below $50,000. Even then, for any month beginning after December 31, 1995, no deduction is allowed for interest above the amount that would have been determined using the applicable rate of interest. Our CPA team reviews these rules alongside the policy.

What the policy covers and how to size the benefit

The policy pays the LLC a death benefit in cash. The company decides how to use it, such as paying down a loan, covering payroll during a transition or funding a search for a replacement. The benefit does not replace the person’s skills or relationships.

Size the benefit from records, not guesses. Useful inputs include:

• Outstanding business debt and any lender requirement for coverage
• Revenue or contracts tied to the key person
• Recruiting, training and transition costs
• Cash the company would need during a gap

Term life insurance covers a set period. A whole life insurance policy builds cash value and can support policy loans. The NAIC life insurance buyer’s guide explains term and permanent coverage and the questions to ask before buying. Dividends on whole life policies are not guaranteed.

Every policy has exclusions and limits in its contract. Florida generally requires that a policy be incontestable after two years from issue, except for nonpayment of premiums and, at the insurer’s option, provisions on benefits in the event of disability and provisions granting additional insurance against accidental death. Florida incontestability rule Every policy must be incontestable after it has been in force during the insured’s lifetime for 2 years from its date of issue, except for nonpayment of premiums and, at the insurer’s option, provisions on disability benefits and accidental-death additional insurance.

How the process works, step by step

The process runs from a coverage review through underwriting to ongoing premium payments.

1. Coverage review. Our team reviews the LLC’s ownership, debts, key roles and any existing coverage or buy-sell terms.
2. Application. The application names the insurer and the policy form number.
3. Health questions. Fully underwritten policies require health questions. Issue may depend on insurability, and the insurer may request records or an exam.
4. Underwriting. The insurer reviews the file. This step can take several weeks, depending on the insurer.
5. Policy delivery. The insurer issues the policy, and the owner reviews the terms before relying on them.
6. Premiums. Florida requires a grace period of at least 30 days for premiums after the first. Florida grace period statute Review coverage each year as the business changes.

Who may not qualify and what affects approval

Eligibility depends on insurable interest, health, age and the insurer’s underwriting rules. The company must show a real business reason to insure the person. Florida law requires that, for a policy on the life or body of another individual, benefits go to the insured or to someone with an insurable interest when the contract is made. Florida insurable interest statute

Health history, age, tobacco use and occupation can affect whether an insurer offers a policy and what it charges. Premiums change with age and health. They also vary by policy type and coverage amount. The coverage review covers those figures for the specific person.

If an application is declined or postponed, our team reviews the reason with the owner before any next step.

Is key person insurance for LLC worth it?

Key person coverage can be worth a close look when one person holds the client, licensing or banking relationships that keep the company running. Check whether any of these apply:

• One person holds key client or licensing relationships.
• A lender asks for life coverage on an owner or manager.
• The company carries significant business debt.
• An existing buy-sell agreement does not say how a key person’s loss would be funded.

Compare the premium and tax treatment with the company’s documented exposure. A policy makes sense when the numbers support it.

Owners who live outside the U.S. or hold shares across borders raise extra questions about ownership and tax. Bring those facts to the coverage review so the insurance and tax sides are both checked.

Why work with NR CPAs & Business Advisors

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals and business owners across the U.S. choose and buy life insurance, with a CPA’s view of tax and cash flow.

Acting as a licensed insurance agent, Nischay Rawal is responsible for this page and receives a commission from the insurer on any policy sold. That commission is disclosed in writing, with complete details of the compensation, in an engagement letter you sign before any engagement begins. Florida law requires agents to tell prospective insureds that they are acting as insurance agents and to name the insurers involved. Florida agent identification law When soliciting or selling insurance products, agents must clearly indicate to prospective insureds that they are acting as insurance agents and name the identified insurers.

Our team includes assistants and office staff who handle scheduling and documents. The firm’s CPA team coordinates review of the LLC’s returns and entity documents.

Common questions about key person insurance for an LLC

Talk with NR CPAs about your LLC’s key person coverage

If you’re reading this after a partner’s illness, a long absence by an owner or a lender’s request for coverage, you may still be weighing your options. That’s a reasonable place to start, and you don’t have to sort out ownership, tax and insurance on your own. To protect the people and the business that depend on one key person, request a coverage review with NR CPAs & Business Advisors.