Bring Your CPA the Facts You Need on Key Person Insurance

Tell your CPA about key person insurance by bringing a short list of facts. Gather your entity type, your owners, your loans, the key person’s role, and any policies you already have. Your CPA can then review the tax and cash-flow side with you. The insurance itself is recommended and sold by a licensed insurance agent, separately from the accounting practice. Many owners ask how do I tell my CPA about key person insurance after they realize one person’s loss would strain the company.

Why Key Person Insurance Comes Up in a CPA Meeting

Key person insurance is a life insurance policy that a business owns on someone whose work it depends on. The company applies for the policy, pays the premiums, and is the beneficiary. If that person dies, the proceeds go to the business, not the family. The Insurance Information Institute describes this coverage as compensation for financial losses caused by the death or disability of a key employee.

Owners often raise this with their CPA because the questions touch the books. Who pays the premium, how it’s recorded, and how proceeds are reported all affect accounting. Use the list below to prepare before that meeting. It focuses on facts to gather, not on what coverage costs.

Facts About Your Business Entity and Owners

Your entity type decides who owns the policy and how it’s taxed. A sole proprietorship, partnership, LLC, and corporation each handle ownership differently. Under federal rules, an eligible entity can elect its tax classification. An entity with at least two members can elect to be treated as an association or a partnership (26 C.F.R. § 301.7701-3). Your CPA confirms which rule fits your company.

Bring these facts to the meeting:

• Every owner’s name and ownership percentage.
• Any agreement that says what happens if an owner dies or leaves.
• The state where the business is organized and where it operates, including cities such as Miami or Orlando if that fits your company.
• Your most recent tax return and your operating or partnership agreement.

Business Loans and Debts the Business Carries

Lenders often want to know how a business would repay debt if a key person were lost. A loss can change cash flow, and cash flow drives the repayment plan. List every obligation so your CPA sees the full picture.

For each loan or credit line, note:

• The lender’s name and the current balance.
• Any personal guarantee you signed.
• Any covenant that mentions management or ownership changes.

Include lines of credit and equipment financing too. These appear in cash-flow talks just like term loans do. Leaving one out gives your CPA an incomplete view of what the business owes.

The Key Person’s Role, Income, and Consent

Your CPA needs to know what this person does and what the company pays them. Start with a plain description of the role. Sales relationships, technical knowledge, client ties, and management duties are common answers.

Also gather:

• The person’s compensation history and how the company reports it.
• Other people who could cover the role, and how long training a replacement would take.
• Whether the person is an owner or an employee, and their age.

Florida law sets a consent rule. A business can insure an owner, officer, or key employee only if that person gives written consent before the policy is bought. The business may not retaliate against someone who refuses (Fla. Stat. § 627.404). Get that consent in writing first. Bring general facts only, not medical records.

Existing Policies, Buy-Sell Arrangements, and Tax Questions

Key person coverage and buy-sell coverage do different jobs. Key person coverage helps the business absorb the financial effect of losing a key person. Buy-sell coverage funds the transfer of an owner’s share when an owner dies or leaves.

List every life, disability, or buy-sell policy in force. For each one, note the insurer, the policy type, the owner, and the beneficiary. According to FINRA, term life insurance covers a limited period. Whole life insurance provides lifetime coverage and includes a cash-value feature.

Tax treatment is the CPA’s side of the conversation. Under 26 U.S.C. § 264, no deduction is allowed for premiums on a life insurance policy when the taxpayer is directly or indirectly a beneficiary under that policy. The statute has exceptions, so your CPA checks whether one fits your facts. Interest paid on proceeds held later is taxable, according to the IRS.

How the Insurance Recommendation Is Made, and Your Next Step

The insurance recommendation comes from a licensed insurance agent, not from the accounting practice. Nischay Rawal is the licensed insurance agent responsible for this page. Insurance is offered by the licensed agent, separately from the NR CPAs & Business Advisors accounting practice.

Compensation matters too. A CPA firm that accepts a commission on a product sold to a client must disclose that fact to the client in writing (Fla. Stat. § 473.3205). Ask how any agent is paid before you agree to work together.

A coverage review is the first meeting with our team. We go over your entity, owners, loans, key person, and existing policies. The agent then explains options in plain words. The key person insurance guide covers the policy in more depth.

If a key employee’s loss would strain your loans or payroll, gather the facts above. Then contact our team through the contact page to request a coverage review.

Frequently Asked Questions