Key Person Insurance for Multiple Key Employees

Key person insurance for multiple key employees is possible, and it is usually set up as one policy per person. Each insured employee gets a separate policy with its own face amount, premium and health review. Below, we explain how that works, what Florida and federal rules ask a business to check, and what a CPA would want recorded.

The Short Answer: Yes, Usually One Policy Per Key Employee

Yes, a business can cover several key employees, and the usual setup is one policy for each person. Each policy names one insured person, sets its own face amount (the death benefit it pays) and carries its own premium.

Key person insurance is a life insurance policy that a business owns on an employee whose death would cause the business financial harm. The Insurance Information Institute explains that these proceeds offset losses from a key employee’s death or disability.

One policy per person keeps each amount tied to that person’s value to the business. A sales leader and a controller may matter in very different ways. Their coverage should reflect that difference, not one number for the whole team.

The exact setup depends on the insurer and the policy form, so review it before any policy is issued.

How Ownership and Beneficiary Work With Several Insured People

In the usual setup, the business owns each policy, the business is the beneficiary, and the employee is the insured person. The business pays the premiums.

Each policy needs its own application, its own insured person and its own face amount. Do not assume one application covers the whole team.

Florida law says a business can have an insurable interest in the owners, directors, officers, partners and managers of the business or any affiliate or subsidiary of the business, and in key employees or key persons of the business or an affiliate or subsidiary (people whose position or compensation is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code), if written consent is obtained from the key employees or persons before the insurance is purchased. The business may not retaliate against someone who does not consent (Fla. Stat. § 627.404).

In practice, get a signed consent from each employee before the application goes in. Keep that consent in the company file with the policy records.

Deciding Which Employees to Include

The right list depends on the business’s own facts. Start by asking which people’s sudden loss would cause a measurable financial hit.

Roles that often come up include owners and senior managers, people who hold major client relationships, people with specialized technical knowledge or licenses, and people who run core operations.

For each person, ask three questions. Would revenue fall? Would projects stall? What would it cost to recruit and train a replacement?

Answer these from the company’s own records of revenue and responsibilities, not from job titles alone. A quiet role can matter more than a senior one if only one person knows how a critical system works.

Sizing the Coverage Amount for Each Key Employee

Each face amount is usually set on what that person brings to the business. Amounts can differ from one employee to the next.

Common inputs include revenue tied to the person, the cost of finding and training a successor, and debts or obligations the business would need to cover. Pull each input from the company’s books rather than estimates.

A larger face amount means a larger premium. Premiums and face amounts can also change with age and underwriting, so check each figure against the policy form.

From a CPA’s view, the coverage amount should fit the business’s cash flow and records. Premiums are paid for years, so a figure the company cannot carry through the premium period is a poor fit, even if it looks right on paper.

Underwriting: Each Insured Person Answers Health Questions

Each employee is underwritten on his or her own application, and health questions are part of that process. Health questions are required, and issue may depend on insurability.

One person’s health history does not automatically change the policy on another person. Each application is reviewed on its own, so one result does not decide the others.

A business should not assume every employee will receive the same premium. The premium is the amount paid to keep the policy in force, and it can differ from one insured person to the next.

Tax and Bookkeeping Points a CPA Would Raise

Death benefits paid to a business are generally excluded from gross income, but employer-owned policies add notice, consent and reporting steps. The IRS states that interest received on proceeds is taxed.

For employer-owned contracts, the exclusion depends on notice and consent. Under the notice and consent rules for employer-owned life insurance contracts, the employee must be notified in writing of the employer’s intent to insure the employee’s life and of the maximum face amount for which the employee could be insured, and must provide written consent before the contract is issued.

Employers that own these contracts must also file a return. For each year the contracts issued after the date of the enactment of this section are owned, the return must show the policyholder’s number of employees at the end of the year, how many of those employees are insured under the contracts at the end of the year, the total amount of insurance in force under the contracts at the end of the year, the policyholder’s name, address, taxpayer identification number and type of business, and that the policyholder has a valid consent for each insured employee (or, if not all consents were obtained, the number of insured employees for whom consent was not obtained) (26 U.S.C. § 6039I).

Under IRC § 264(a)(1), no deduction is allowed for premiums on any life insurance policy if the taxpayer is directly or indirectly a beneficiary under the policy, which includes a business that is the beneficiary of its own key person policy. Confirm the treatment for each policy before you book it.

Keep one file per policy. Record the insured person, owner, beneficiary, premium schedule, face amount and the date of each consent.

For whole life policies, show cash surrender value apart from the face amount. Keep the guaranteed values and the non-guaranteed values on separate lines in your records.

Nischay Rawal, a licensed insurance agent, offers insurance separately from the firm’s accounting practice.

When an Employee Leaves, Retires or Changes Role

The policy stays a contract among the business, the insurer and the insured person. Its terms control any change.

Ownership transfer, surrender and cancellation rules are set by each insurer and policy form. Read them before making any change, because a transfer can carry its own tax and paperwork steps.

Key person coverage can also sit alongside a buy-sell agreement when an owner’s departure is a planning concern. An LLC’s operating agreement governs relations among its members and the company (Fla. Stat. § 605.0105).

When you plan a review, bring a list of staff changes you expect, the owner of each policy, and who pays each premium.

Next Steps: Talk Through Your Business’s Key Employees

If several people’s loss would hurt your business, a coverage review can help you map a policy for each one. A business owner in Florida, including in Miami or Fort Lauderdale, may find it useful to identify the people who run sales, operations and key client relationships.

Read more in our key person insurance guide before you meet.

Our fees for a coverage review are set out in writing before any work begins.

Quick Answers