Keep Your Florida Business Steady if a Key Owner Is Lost

If you are researching key person insurance to repay business loan balances, here is the short answer. The business owns the policy and receives the death benefit. The business then decides whether to use that money on a loan, a line of credit or another bill. This guide is written for Florida business owners, including those in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa and Jacksonville. It also covers questions from Indian-American and NRI owners.

What key person insurance is and who it fits

Key person insurance is a life insurance policy that a business owns on an essential owner, executive or employee. It is also called key man insurance. The Insurance Information Institute explains that key person life insurance compensates a business for financial losses caused by a key employee’s death or disability.

It usually fits:

• Closely held companies and family businesses
• Partnerships and professional practices
• Any business where one or a few people drive revenue or hold key client relationships

Three roles matter in every policy:

• Owner: the business, which pays the premiums.
• Insured: the key person, whose life is covered. This person does not receive the payout.
• Beneficiary: the business, which receives the death benefit.

Before a key person policy is bought, it is worth confirming the requirements that apply to both the business and the person being insured.

How proceeds can support business loans and lines of credit

Using key person insurance to repay business loan balances works like this. The policy pays a lump sum to the business. The business may then use it on loan or credit line balances. The policy does not pay your lender automatically. The business makes that choice.

Owners usually raise this question with these kinds of debt:

• Term loans with a remaining balance
• Equipment financing
• SBA-backed loans
• Revolving lines of credit

For example, a company owes $300,000 on a term loan. If the key person dies, the policy pays $300,000 to the business. The company can then choose to pay off the balance, or keep the cash for other needs.

Before you rely on this, check three things in your loan papers:

• Any collateral assignment or lender reporting rules
• Whether the lender requires key person coverage
• Any personal guarantee, which is a separate question from the policy

Name the business as beneficiary. Florida law says that when insurance is payable to the insured’s estate, the proceeds become part of that estate and follow probate rules. Fla. Stat. § 222.13 Once the insurer pays as directed, it has no further liability under the policy.

What the coverage includes and what to check in the policy

The policy’s terms decide how long coverage lasts, what it costs and what happens if premiums stop. Review these parts before you buy:

• The insured person, the owner and the beneficiary
• The face amount, which is the amount paid at death
• The premium payer and premium due dates
• The policy form number and the insurer that issues the policy

Term life insurance covers a set period. Many owners match that period to the years left on a loan. Check renewal rules and any age-based premium change before you buy.

Whole life insurance can last for the insured’s lifetime when premiums are paid as required. Its values include guaranteed and non-guaranteed parts, and an illustration should show them separately. A policy loan may be available only after the policy has cash surrender value and no premium is in default. That rule does not apply to term policies.

Fla. Stat. § 627.455 Under this section, every insurance contract shall provide that the policy is 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, as to provisions relative to benefits in event of disability and as to provisions granting additional insurance specifically against death by accident or accidental means. Exclusions and coverage limits can still be raised.

Expect health questions. Issue may depend on insurability, so the insurer may review health history before approving coverage. The NAIC Life Insurance Buyer’s Guide covers term versus permanent coverage and questions to ask before buying.

How the process works, step by step

The process starts with a coverage review. The steps below run in order, but the insurer sets the pace of underwriting.

1. Coverage review. You share the business structure, loan balances, lender requirements and the name of the key person. We explain the options in plain words.
2. Gather information. You provide business financial information, ownership details and the key person’s written consent. The insured’s health history goes on the application.
3. Application and underwriting. The insurer reviews the application. Issue may depend on insurability.
4. Policy delivery and review. Read the policy, the illustration, the exclusions and your loan papers before you sign. Put any questions in writing.
5. Ongoing management. Track premium due dates. Update ownership and beneficiary details as the business changes. Review coverage when a loan is paid off or refinanced.

Why NR CPAs & Business Advisors handles this coverage

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

Our team reviews a policy alongside the business’s cash flow, debt and tax reporting. A loan payoff, a premium and a tax filing affect one another, so we look at them together. Under federal tax law, life insurance death benefits are generally excluded from gross income, but the exclusion has exceptions. For an employer-owned policy, IRC § 101(j) caps the excluded amount at the premiums and other amounts the policyholder paid for the contract. The cap does not apply only when the notice-and-consent requirements were met before the policy was issued and the payment also falls within one of the statute’s listed exceptions, such as those based on the insured’s status. 26 U.S.C. § 101(a)

Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the firm’s accounting practice. Florida law requires agents to clearly say they are acting as insurance agents when selling insurance. Nischay Rawal is licensed in Florida.

If the firm accepts a commission on a policy, it discloses that to the client in writing, as Florida law requires for CPA firms. Fla. Stat. § 473.3205

We offer no rebates or inducements to buy insurance. Any service we describe relates to the policy itself. We also help Indian-American and NRI business owners who have questions about ownership, insurability and loan structure.

Frequently asked questions