Keep Your Practice Steady if a Key Partner Is Lost

Key person insurance is a life policy a practice owns on a doctor or lawyer whose work the practice depends on. If that person dies, the death benefit is paid to the business. That money can help cover payroll, loan payments and other bills while the practice adjusts. NR CPAs & Business Advisors, a Miami CPA firm, reviews this coverage alongside the practice’s finances. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice.

What key person insurance is and why professional practices use it

Key person insurance is a policy the business owns, and the business is the beneficiary. The insured is a key doctor, lawyer or partner whose skills, referrals or client relationships the practice relies on.

A practice can have strong staff and still lose much of its revenue when its main clinician or attorney dies. Patients and clients often follow that person. The practice may still owe rent, payroll and loan payments.

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.

This is different from personal life insurance bought for a family. Personal coverage pays the family directly. Key person coverage pays the practice, which can then keep the business stable for the people who depend on it, including staff and partners. That is how it helps protect your loved ones.

Who should consider key person coverage: doctors, lawyers and practice partners

Key person coverage fits practices where one owner carries much of the revenue, patient base or client work. Common examples include:

• A solo or small-group physician whose patients and referrals center on one or two clinicians.
• A law firm partner whose client relationships or trial work would be hard to replace quickly.
• A practice with bank loans, equipment leases or payroll that continue after an owner dies.
• Partners who expect a buyout, where funding may be needed.
• An owner who is the only clinician credentialed for key services.

Florida law lets a business insure an owner, partner, officer or key person only with written consent obtained before the policy is bought. The law also bars the business from retaliating against someone who refuses consent. See Fla. Stat. § 627.404.

What the coverage includes: death benefit, policy types and key terms

The death benefit is the amount the insurer pays when the insured dies. Each policy also sets terms that matter to a practice.

• Term life insurance covers a set period. Whole life insurance lasts for the insured’s life and can build cash value.
• Cash value and dividends are not guaranteed. Any illustration shows guaranteed and non-guaranteed values separately, with its limits.
• Policy loans: Florida’s loan rule applies to policies with a cash surrender value. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” It does not apply to term policies (Fla. Stat. § 627.458).
• Incontestability: Florida requires a two-year incontestability period, with stated exceptions such as nonpayment of premiums (Fla. Stat. § 627.455). The insurer can still rely on policy exclusions and restrictions (Fla. Stat. § 627.463).
• Grace period: Florida requires a grace period of at least 30 days to pay a premium after the first (Fla. Stat. § 627.453).
• Age or sex errors: If the age or sex of the insured, or of any other individual considered in determining the premium or benefit, was misstated, the benefit is what the premium would have bought at the correct age or sex (Fla. Stat. § 627.456).

We name the insurer and policy form number for any specific policy we discuss. We also explain exclusions, renewability and any age-based change before a policy is issued.

How premiums and death benefits are generally treated for tax and cash flow

Premiums are generally not deductible when the business is the beneficiary. Section 101 of the Internal Revenue Code addresses the treatment of life insurance proceeds payable by reason of death. Section 101 of the Internal Revenue Code addresses the treatment of life insurance proceeds payable by reason of death.

• Premiums: 26 U.S.C. § 264 denies a deduction for life insurance premiums when the taxpayer is directly or indirectly a beneficiary under the policy or contract.
• Interest on policy loans: The same section limits deductions for interest on policy debt.
• Death benefits: 26 U.S.C. § 101 generally excludes amounts paid by reason of the insured’s death from gross income, except as otherwise provided in paragraphs (2) and (3), subsection (d), subsection (f), and subsection (j). The IRS says interest on the proceeds can be taxable when the proceeds are held under an agreement to pay interest on them.
• Special rules: Section 101 also includes a reportable policy sale rule. That rule can change the result in some cases.

Premium cost is one line in the cash flow model we build with the practice. Results depend on policy design, ownership and entity type, so we review the figures before a policy is bought.

How key person coverage works with a buy-sell agreement

A buy-sell agreement sets the price and terms for an owner’s share when that owner dies, retires or becomes disabled. Insurance can supply the cash to fund it.

• Cross-purchase: Each owner buys a deceased owner’s share and may own a policy on the others.
• Entity purchase: The practice buys the share and owns the policies on its owners.

Florida law gives each individual party to a contract for the purchase or sale of an interest in a business entity an insurable interest in the other parties’ lives, for that contract only (Fla. Stat. § 627.404). Florida’s partnership statute also sets the buyout price when a partner leaves without dissolving the partnership. That price is the amount the partner would receive on a sale at the greater of liquidation or going-concern value, plus interest from the date of dissociation to payment, less any wrongful-dissociation damages and other amounts owed by the partner, which must be offset against the buyout price (Fla. Stat. § 620.8701).

A mismatch leaves a gap when the money is needed. We line up the policy amounts with the agreement’s price and terms and with the practice’s financials.

How the process works: from coverage review to policy issue

The process starts with a coverage review. It then moves through application, underwriting and policy issue, with yearly checks after that.

1. Coverage review: We map revenue, debt, payroll, owners and goals.
2. Policy choice: We identify the policy type, insured person, owner, beneficiary and amount, with the insurer and form number.
3. Application and health questions: Coverage requires health questions, and issue may depend on insurability.
4. Underwriting and issue: The insurer sets the timing based on the application.
5. Annual review: We check the policy each year, or sooner when revenue, partners or debts change.

We disclose how the insurance is paid, in writing, before any engagement. That disclosure appears in an engagement letter the client signs.

Why NR CPAs & Business Advisors for professional practice insurance

NR CPAs & Business Advisors is a Miami CPA firm. It serves businesses, families and professionals across the United States, including clients in Florida cities such as Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa and Jacksonville.

• We connect tax, cash flow and insurance in one review, so the policy amount reflects the practice’s numbers.
• Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice.
• Support staff handle scheduling, document collection and follow-up, so owners can focus on patients or clients.
• Our team explains insurance terms in plain words before any decision is made.

Frequently asked questions about key person insurance for doctors and lawyers

Call us today to protect your practice and the people who depend on it

If a partner’s death would leave payroll, loan payments and patients or clients without their main doctor or lawyer, the practice needs a plan before that day comes. Call NR CPAs & Business Advisors today, or request a coverage review.