Moving a Key Person Policy to the Business Owner? Plan the Transfer Carefully

Owners often ask how to transfer key person life insurance policy to owner without creating tax surprises. The short answer is that the business can assign the policy to the insured or another named owner. The price, the tax rules and the estate effects decide whether the move works as planned. This page explains the steps, the federal rules that apply, and the questions to answer first.

What a key person policy ownership transfer is and who it is for

A key person policy ownership transfer moves a business-owned life insurance policy to a new owner, often the person insured. Key person insurance is a life insurance policy a business buys on someone it depends on, such as an owner or key employee. The business pays the premiums, owns the policy and is the beneficiary. The coverage helps the business handle financial losses if that person dies. The Insurance Information Institute explains who counts as a key employee.

When that person leaves, retires or changes role, the business may no longer need the policy. The business can then transfer ownership to the insured or another person. The transfer often includes a price based on the policy’s value at that time.

Ownership transfers are usually considered by:

• Owners who are exiting a company
• Key employees who are leaving
• Partners restructuring a buy-sell arrangement
• Families handling a policy after a business change

Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the firm’s accounting practice. The issuing insurer is identified in each coverage review.

What the transfer covers: the policy, the value, and the paperwork

A transfer covers the policy itself, its value at transfer, the beneficiary choice and the insurer’s forms. Each part has to match the others.

• Policy basics: face amount, type of plan (term life or whole life), premium amount and payment period.
• Value at transfer: the price and how it was set, written down. Guaranteed and non-guaranteed values appear on separate lines.
• Beneficiary designation: the new owner names a beneficiary, and that choice should match the owner’s wishes.
• Paperwork: the insurer’s ownership change forms and a written approval from the business.
• Contract terms: limitations, exclusions and any age-based changes stay with the policy after the change.

Florida law sets a base rule for policies on another person’s life. The benefit must be payable to the insured, the insured’s personal representatives, or a person with an insurable interest when the contract was made. Florida Statutes § 627.404 sets that rule.

The transfer-for-value rule and the exception for transfer to the insured

The cap equals the actual value paid plus the premiums and other amounts the new owner pays later.

The statute also lists transfers that the cap does not reach. So the buyer’s relationship to the insured matters.

Because the rules turn on who the buyer is and how the deal is priced, a transfer to the insured needs its own review. We check the parties, the price and the timing against the statute before anything is signed.

The IRS says life insurance death benefits are generally excluded from gross income. Interest paid on the proceeds can still be taxed. That general rule is why the transfer rules matter so much.

How to transfer key person life insurance policy to owner: steps and timeline

The transfer runs in five steps: a coverage review, approvals, valuation, insurer forms and an accounting review.

1. Coverage review. We review the policy, the insurer, the face amount, the premium and the current value.
2. Approvals. The business records why it is transferring the policy and gets the insured’s written agreement.
3. Valuation and price. Gift valuation generally follows what the insurer charges for comparable contracts. For a policy in force for some time, a formula approximation may apply, as 26 C.F.R. § 25.2512-6 explains. A price below value can be treated as a gift under IRC § 2512.
4. Insurer forms. Complete the ownership and beneficiary forms and get written confirmation from the insurer.
5. Accounting review. Confirm who pays premiums from now on and how the transaction is recorded in the business books.

Settle every essential term in writing. Under Third District contract law, which covers Miami-Dade, a contract needs agreement on all essential terms. Timing depends on the insurer’s processing and whether every form is complete.

Tax, cash flow, and estate effects to check

Three areas need checking: the estate, the cash flow and the business plan. Each can change after the owner changes.

• Estate inclusion: if the insured keeps incidents of ownership at death, the death benefit can be included in the gross estate under IRC § 2042. A reversionary interest counts only if it exceeded 5 percent of the policy’s value.
• IRC § 2036 reads: “(a) General rule The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—.” A bona fide sale for full value is an exception. IRC § 2036 reads: “(a) General rule The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—.”
• Owner-controlled corporations: the corporation’s incidents of ownership can be attributed to the decedent through his stock ownership, under the circumstances set out in 26 C.F.R. § 20.2042-1.
• Interest on policy loans: IRC § 264 limits deductions for interest on debt used to carry a policy. A key person exception applies up to $50,000 of debt per insured, but only for an officer or 20-percent owner, with limits on how many people qualify and an interest-rate cap.
• Business effects: the company loses this coverage, and any buy-sell agreement that relied on the policy needs review.

For NRI and cross-border owners, U.S. reporting and ownership rules turn on the specific facts. We confirm them at the coverage review.

Why work with this firm on a transfer

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals and business owners across the United States, including Indian-American households and business owners, choose and buy life insurance.

• The accounting side reviews the tax treatment, valuation and cash flow of a transfer.
• Nischay Rawal, a licensed insurance agent, handles the policy, the insurer forms and the coverage itself.
• Coverage types include whole life insurance, term life insurance, key person insurance, buy-sell agreement insurance, estate planning life insurance and NRI life insurance.
• Our team works with the business’s accountant and attorney when they are already involved.

Questions owners ask before a transfer

Most key person policies can be assigned to a new owner, subject to the insurer’s forms and the transfer rules.

Talk with our team about your transfer

If a business partner is retiring or a key employee is leaving, the policy’s ownership should be reviewed before anyone signs. You may be handling this for a family member or partner, and the decision may already feel set. We can walk through the policy, the price and the tax effects one step at a time. A clear plan helps protect your loved ones. Contact our team to start a coverage review of the policy, the insurer and the business structure.