Key Person Life Insurance and Suicide Exclusions: A Florida Guide

Short Answer: Does Key Person Life Insurance Pay After a Suicide?

Key person life insurance may pay in full, pay a reduced amount, or pay nothing after an insured dies by suicide. The result turns on the policy’s suicide clause, the date of death counted from the policy’s issue date, and the exact policy wording.

Many policies pay the full death benefit once the suicide exclusion period has passed. Inside that period, many policies limit payment, often to a refund of premiums paid. These are common patterns, not a rule every insurer follows. The policy form you hold answers the question for that contract.

Business owners in Florida, including those in Miami, Tampa and Jacksonville, should read this clause before they rely on the coverage for a buy-sell plan or a loss of a key employee.

What a Suicide Clause Is and How It Fits Among Exclusions

A suicide clause is a policy provision that limits or excludes the death benefit when the insured dies by suicide within a set period after the policy is issued. It is one of several exclusions written into a life insurance policy form.

Other exclusions can cover risks such as aviation or war. Each one appears in the policy itself. You don’t have to guess whether it applies. You can find it in the form’s exclusion section.

Insurers include the clause as a standard underwriting term. The clause is meant to address the risk that a policy is bought with the plan to end one’s life soon after coverage starts. Its length and wording vary by insurer and policy.

How the Suicide Exclusion Period Is Counted

The exclusion period usually starts on the policy’s issue date. It does not start on the day the business first talked about coverage, or the day the application was signed. Those dates can differ from the issue date, so check the form’s definition.

Life insurance policies may include a suicide exclusion period, and its length is stated in the policy itself. The exact length in your policy controls.

Here is an illustration only. Suppose a policy is issued on March 1 with a 2-year suicide exclusion. A death on February 1 of the second year falls inside the period, so the policy’s limit applies. A death on April 1 of the second year falls after the period, so the full benefit may be payable under the form’s terms.

This example does not predict any outcome. The result depends on the wording of your policy, the exact dates, and the rest of the contract.

How Key Man Life Insurance Works and Who Receives the Benefit

Key person life insurance, also called key man life insurance, is a policy a business buys on a key employee or owner. The company’s operations or revenue may depend on that person. The Insurance Information Institute explains that this coverage compensates a business for financial losses caused by the death or disability of a key employee, per its guide to life insurance for key employees.

In the usual setup, the company owns the policy, pays the premiums, and is the beneficiary. The insured is the key person. Ownership and beneficiary choices matter because they decide who receives any payment.

Florida law allows a business to have an insurable interest in the life of an owner, officer, or key person. The business needs written consent from that person before the insurance is bought. The business also may not retaliate against a person who refuses consent, under Fla. Stat. 627.404.

The suicide clause applies to the policy as a whole. The company’s intent or the key person’s value to the business does not change what the form says.

What the Company Receives If the Suicide Clause Applies

When the clause applies, many policies pay a refund of premiums rather than the full face amount. In plain terms, the insurer returns the premiums that were paid, and the rest of the death benefit is not paid.

The refund amount, its timing, and any interest or conditions are set in the policy form. Read those terms directly. Do not rely on a summary, a sales illustration, or a verbal description.

Business planning should account for the gap between the face amount and the refund. A policy that funds a buy-sell agreement or covers a key employee’s loss may leave a large gap if the clause applies.

Tax rules add another layer. Under 26 U.S.C. 101, amounts received under a life insurance contract paid by reason of death are generally excluded from gross income. For employer-owned life insurance contracts, the exclusion from gross income for death proceeds is limited to the sum of the premiums and other amounts the policyholder paid for the contract, subject to exceptions in the tax law.

Suicide Clause Compared With the Contestability Period

The suicide clause and the contestability period are different. The suicide clause looks at how the insured died within its window. The contestability period looks at whether the application information was accurate.

Florida law requires that life insurance policies become incontestable once they have been in force during the insured’s lifetime for 2 years from the date of issue, as set out in Fla. Stat. 627.455. The rule has exceptions, including nonpayment of premiums. The Florida incontestability statute sets that 2-year rule.

Under Fla. Stat. 627.463, defenses based on exclusion or restriction provisions may still be asserted at any time. So the suicide clause can remain relevant after the contestability period ends.

Each period is set by the policy and may differ in length. Identify both before you rely on the coverage.

Questions to Check in the Policy Before You Buy

Use this checklist when you review a key person policy form:

• The insurer’s name, the policy form number, and the issue date.
• Check the length of any suicide exclusion period and the date it runs from, as the policy form defines it.
• The premium refund language, including any interest or conditions.
• Whether the company or the insured’s estate is the named recipient.
• The contestability period length and any stated exceptions.
• The owner and beneficiary designations.
• How a change in ownership or a policy change would affect the suicide clause.

Ask the insurer for the full policy form. Compare the clause wording with your buy-sell or funding plan. For a policy on the life of the decedent, 26 U.S.C. 2042 counts in the decedent’s gross estate (the property valued for federal estate tax) any amount receivable by the executor as insurance, whether or not the decedent held any incident of ownership. It also counts any amount receivable by other beneficiaries when the decedent possessed at death any incident of ownership in the policy, exercisable alone or with another person. IRC § 2042 reads: “For purposes of the preceding sentence, the term “incident of ownership” includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent.”

If an applicable policyholder owns 1 or more employer-owned life insurance contracts issued after August 17, 2006, the date IRC § 6039I was enacted, that section requires it to file a return for each year it owns those contracts. Any applicable policyholder owning such contracts during a year must also keep the records needed to show whether the requirements of § 6039I and § 101(j) are met. 26 U.S.C. 6039I sets out those return and consent items.

Talk With Us About Your Key Person Coverage Before You Decide

If you are a business owner weighing a key person policy, the suicide clause may affect the protection your company expects in the first years. Reviewing that wording before you buy can help you see what the policy will and won’t pay.

NR CPAs & Business Advisors offers a coverage review of key person policy wording, ownership setup, and buy-sell funding. Our team can walk through the points above with you. Insurance is offered by the licensed agent, separately from the accounting practice; the agent is paid a commission, which is disclosed in writing before any engagement begins. You can contact our team to start that conversation.

Insurance is offered by Nischay Rawal, a licensed insurance agent in Florida, separately from the accounting practice of NR CPAs & Business Advisors.

Frequently Asked Questions