Plan for the Business If a Key Person Is Lost

Key person insurance is life insurance that a business buys on an employee or owner whose work it depends on. The company pays the premiums and is generally the beneficiary, subject to the policy terms and insurer approval. This page explains who it fits, how the process works, and what to check before you decide.

What Key Person Insurance Is and Who It Fits

Key person insurance is a policy the company owns. It insures someone whose loss would hurt the business, such as a founder, a lead engineer, or the person who manages major client accounts. The policy helps the business plan for that gap.

Early-stage companies and growing firms with only a few people carrying critical knowledge or relationships often consider it. Florida law limits who a business may insure. Under the Florida insurable interest statute, a business has an insurable interest in a key person only if it gets that person’s written consent before the insurance is bought.

A personal policy belongs to the insured and their family. Key person coverage belongs to the company, which decides how to use the benefit. How this works depends on the insurer, the policy terms, and the business’s structure. This is general information, not legal or tax advice.

Who to Cover and What the Policy Can Help With

The business should list the people whose absence would most affect operations. Rank roles by real impact, not by title. A founder with no daily role may matter less than the engineer who holds the only copy of the code.

A business may consider the policy to help with:

• Recruiting and training a replacement
• Covering cash flow during a leadership change
• Supporting conversations with lenders or investors

Some investors or buyers may view coverage as one factor. It does not guarantee any valuation or investment outcome.

Consent comes first. Florida law requires the insured to consent in writing to the contract and its terms. Federal rules add steps for employer-owned contracts. Rules on written consent and written notice to the employee may apply to employer-owned policies on an employee’s life, and the specific requirements depend on the policy and the individual’s circumstances. Under IRC § 6039I, every applicable policyholder owning one or more employer-owned life insurance contracts issued after the enactment of that section must file a return, at the time and in the manner the Secretary prescribes by regulation, showing for each year such contracts are owned.

How the Process Works, Step by Step

The process usually moves through five steps. The timeline depends on the insurer and how complete the file is. No fixed timeframe is promised.

1. Coverage review. You meet with us to discuss the business, the key person’s role, and why the company wants the policy.
2. Information gathering. The insured’s age, health history, occupation, and the company’s ownership are documented. Florida law adjusts the benefit if an age was misstated, under Fla. Stat. § 627.456.
3. Application and consent. The insured signs written consent. Health questions are required, and issue depends on insurability.
4. Underwriting. The insurer reviews the file, may ask for records, and decides whether to issue the policy and on what terms.
5. Policy issue and setup. Premium payments are set up. Florida law requires a grace period of at least 30 days for premiums after the first, under Fla. Stat. § 627.453. The Florida DFS life insurance guide explains the return period for new policies. Your policy states its exact length.

Term or Permanent: Choosing the Policy Type

Term life covers a set period. Whole life is permanent coverage that may build cash value under the contract. The right fit depends on the business’s goals, the key person’s role, and the insurer’s offer. The NAIC Life Insurance Buyer’s Guide explains term and permanent choices in plain language.

• Term life: Premiums and the level-premium period depend on the specific policy and contract. Coverage can end when the term ends.
• Whole life: Cash value includes guaranteed and non-guaranteed amounts. Dividends, if any, are not guaranteed.
• Loans and withdrawals: These can reduce both cash value and the death benefit. Terms depend on the policy. Florida’s policy loan rules do not apply to term policies or term riders.
• Whole life is life insurance. This page does not present it as a savings or investment vehicle.

Tax treatment depends on the policy, the business structure, and the individual’s situation. Under IRC § 264, no deduction is allowed for premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract. Premiums generally are not deductible when the business is the beneficiary. Death benefits may be excluded from gross income, but exceptions apply, including transfer-for-value rules and, for employer-owned contracts, the rules in IRC § 101(j), under which death benefits above premiums paid can be taxable unless notice-and-consent requirements are met before issue and an exception applies. Tax treatment depends on the policy, the contract, and the individual’s circumstances. This is general information, not tax advice. This is general information, not tax advice.

Using a Rule of Thumb as a Starting Point for Coverage Amount

Some planners use a multiple of income as a rough starting point for coverage. That is a rule of thumb, not a definitive coverage need. The right amount depends on what the business needs to protect.

Start with a list of costs the business would face:

• Debt the company carries
• Payroll during a gap in leadership
• Recruitment and training costs
• The key person’s contribution to revenue

Age, health, occupation, and the insurer’s underwriting can affect both cost and the amount that can be issued. Premiums vary by insurer, policy, and individual facts, and this page does not quote them. Any future coverage increase depends on insurability and circumstances at that time.

Why Work with NR CPAs & Business Advisors

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

Insurance is offered by Nischay Rawal, a Florida-licensed insurance agent, separate from the accounting practice. Under Fla. Stat. § 626.9531, an agent must clearly tell prospective insureds that they are acting as an insurance agent.

The firm brings:

• A CPA view of tax, cash flow, and business structure, offered as general context
• Written disclosure of how any insurance compensation works before an engagement
• A plain description of what the firm does, without claims about the quality of its results

Common Questions and Objections