Term or Whole Life Key Person Insurance in Florida

A term or whole life key person insurance policy pays the business a death benefit if a key owner or employee dies. The right choice depends on how long the business will need that money. A loan that ends in five years points one way. A buy-out that could run for decades points another.

This guide shows how to match the policy to that obligation. It is written for Florida business owners, partners and finance leaders, including Indian-American owners of family-run companies.

What a key person policy does for the business

Key person insurance is a policy the business owns, pays for and names as beneficiary. When the insured key person dies, the death benefit goes to the company.

The Insurance Information Institute explains that key person coverage compensates a business for financial losses caused by the death or disability of a key employee. A key person is someone whose loss would hurt revenue, lender confidence or the ability to meet a debt.

Florida law sets rules for these policies. A business entity can insure the life of an owner, director, officer, manager or key employee, but written consent from that person must be obtained before the insurance is bought. The Florida insurable interest statute also bars the business from retaliating against a key person who refuses to consent.

Any policy involves health questions. The insurer uses the answers to decide whether to issue the policy and on what terms.

Start with the obligation: list what the death benefit must cover

Start by listing the money the business would need if the key person died. That list, not the policy name, decides between term and whole life.

Common obligations include:

• A term loan or line of credit the business must repay.
• A payment under a buy-sell agreement, where owners agree how a departing owner’s share is bought.
• Lost revenue while the business finds and trains a replacement.
• Transition costs for a key employee’s clients or projects.

Sort each item by timing. Some obligations have a fixed end date, such as a loan maturity or a buy-out schedule. Others are open-ended, such as ownership succession or an executive who has no set exit date.

A common mistake is sizing the policy to the company’s total value. A better approach is to size it to the specific debts and payments the business must cover. Those inputs drive the policy decision.

When term life insurance fits a time-limited obligation

Term life insurance fits a need with a known end date. It pays a death benefit only for a set period and has no cash value component.

The FINRA insurance guide explains that term life provides coverage for a limited period. Whole or permanent life offers lifetime coverage and a cash value feature.

Term often matches a loan the business will repay, or a key employee expected to stay through a defined project. The coverage should run at least as long as the obligation.

Premiums at renewal are often higher at older ages. The policy states how and when those changes occur, so read the renewal terms before you buy.

Term has limits. Coverage ends when the term expires. If the obligation runs longer than the term, the business needs a plan for the gap. Florida’s policy loan rules do not apply to term policies, according to the Florida policy loan statute.

When a whole life insurance policy fits a long-running obligation

Whole life insurance fits an obligation that may last for the insured’s lifetime. A buy-sell agreement that could be triggered at an unknown time is one example.

The ALDOI policy types guide describes whole life by its premiums and cash value. It also notes that universal and variable life are other forms.

Keep guaranteed and non-guaranteed values separate when you compare policies.

Guaranteed values come from the policy contract. These are the amounts the contract states it will provide, such as minimum death benefit and cash value figures.

Non-guaranteed values are not promised. Dividends on a participating policy are not guaranteed. Projected values can change with the insurer’s experience.

Under Florida law, the loan value of the policy is at least equal to the cash surrender value at the end of the then-current policy year, less any permitted deductions. Under Florida law, the insurer can advance a loan once the policy has a cash surrender value and no premium is in default. That happens only after the insurer mails at least 30 days’ notice.

A whole life insurance policy is a life insurance contract, not an investment. Its cash value does not replace a plan for the business obligation.

Federal tax law also matters. The Internal Revenue Code section 264 text limits deductions for certain premiums and interest. Under IRC § 264(a)(1), no deduction is allowed for premiums on any life insurance policy if the taxpayer is directly or indirectly a beneficiary under the policy, which generally covers a business-owned key person policy. Contact us to discuss how this applies to your business.

Term or whole life: answers to the common questions

Neither term nor whole life is better in every case. The better fit is the one that matches the length of the obligation.

Term fits a debt or buy-out with a clear end date. Whole life fits a need that may last for the insured’s lifetime. If you are asking which to pick, start with the end date of the obligation.

The age question depends on two things: the term length the business chooses and when the obligation ends. Premium changes at renewal or after a level period are set out in the policy.

Is key person insurance worth it? It can be, when one person’s loss would leave a debt or buy-out payment the business cannot cover. Weigh the cost of coverage against the size and timing of that obligation.

Under 26 U.S.C. 101, amounts received under a life insurance contract by reason of the insured’s death are generally not included in gross income. For an employer-owned life insurance contract, which can include a business-owned key person policy, section 101(j) limits the amount the business may exclude to the premiums and other amounts it paid for the contract, unless the statute’s notice-and-consent requirements and one of its exceptions are met. Interest on proceeds the insurer holds is taxable, and the transfer-for-value rule can apply when a policy changes hands. The business decides how to use the proceeds under its own agreements.

Documents, insurability and the business’s records

Before issue, the insurer usually asks for health information about the insured. It may also ask for financial information about the business and the business’s reason for the coverage.

If the insurer finds health or other factors that matter, the policy may take longer to issue or may be issued on different terms.

Keep written consent from each insured key person in your file. Some business-owned policies also carry federal reporting duties.

Frequently asked questions