Planning a Key Person Policy Transfer When Your Business Changes Hands

Can key person insurance be transferred to a new owner? Sometimes. Whether it can, and how, depends on the policy form and the insurer’s rules. This page explains what decides the answer and what to settle before a sale or buyout. NR CPAs & Business Advisors is a Miami CPA firm. Insurance is offered through Nischay Rawal, a licensed insurance agent, separately from the accounting practice.

Short Answer: The Policy Form and the Insurer’s Rules Decide

A key person policy can change owners only when the policy form and the insurer allow the change. Key person insurance is life insurance a business buys on a person whose work or loss would hurt the company. That person might be an owner, a senior manager, or a key salesperson. The Insurance Information Institute explains that this coverage helps a business cover financial losses caused by a key employee’s death or disability.

The change is not a private deal. The business and a buyer can agree on terms, but the policy moves only when the insurer processes a written request. A sale of the company does not move the policy by itself.

An ownership or beneficiary change can also carry tax and underwriting effects. The CPA reviews those effects before the change is made. Think of the purchase agreement as the deal and the insurer’s paperwork as the transfer.

Who Owns the Key Person Policy, and Who Is the Beneficiary?

In the common setup, the business owns the policy and is also the beneficiary. The key person is the insured. A policy has three roles, and each one matters in a transfer.

The owner controls the policy. The owner decides who the beneficiary is and what changes get made. The insured is the person whose life is covered. The beneficiary is the person or entity that receives the death benefit.

Who pays for key man insurance? Usually the business pays the premiums when it owns the policy. That cost affects the tax answer. Federal law provides that no deduction is allowed for premiums on any life insurance policy if the taxpayer is directly or indirectly a beneficiary under the policy (26 U.S.C. § 264(a)(1)). That is why the CPA reviews the owner and beneficiary lines together. For the basics, see our key person insurance guide.

How an Ownership Change Is Processed by the Insurer

The insurer processes an ownership change on its own forms. Expect the insurer to ask for a signed ownership change form, the policy number, the new owner’s details, and the insured’s consent where its rules require it.

Florida law ties a business’s insurable interest in a key person to written consent. A business entity can insure a key employee or key person if that person gives written consent before the insurance is bought (Fla. Stat. § 627.404). The same statute bars the business from retaliating against a key person who refuses consent.

Florida law also says the insurable interest need not exist after coverage starts (Fla. Stat. § 627.404).

A sale of the business does not automatically move the policy to the buyer. Once the insurer confirms a change in writing, keep that confirmation with the company’s records.

Changing the Beneficiary Without Changing the Owner

You can change the beneficiary without changing the owner. The two steps can happen at different times. Naming a new beneficiary does not hand over control of the policy. The owner still holds the policy.

The beneficiary designation should match the buy-sell agreement and the other business documents. Here is a simple example. Two owners each hold a policy on the other. Their agreement says the surviving owner buys the deceased owner’s share. If the policy still names the deceased owner’s family as beneficiary, the death benefit goes to the family. The surviving owner may not receive the money the agreement expects. The CPA checks that the documents and the beneficiary line up before anything changes.

Tax Questions a CPA Reviews Before Any Transfer

A change of hands can create tax questions, so the CPA reviews them before any transfer. Federal law generally leaves life insurance death benefits out of gross income, but the statute has exceptions. The Internal Revenue Service explains when proceeds may be taxable or nontaxable.

Section 101 treats policy sales differently from other transfers. It defines a “reportable policy sale” as the acquisition of an interest in a life insurance contract by someone with no substantial family, business, or financial relationship with the insured apart from that interest (26 U.S.C. § 101). The definition also reaches interests held through a partnership, trust, or other entity.

Estate tax rules look at who held the policy’s incidents of ownership at death. Proceeds payable to other beneficiaries are included in the gross estate to the extent the decedent held those incidents (26 U.S.C. § 2042). So the owner’s identity matters beyond income tax. The CPA weighs these points against the facts of the proposed change.

Insurance is offered through the licensed agent, separately from the accounting practice.

Underwriting and Insurability Effects of a Change

A change in ownership or coverage can prompt the insurer to review the policy under its own rules. That review may ask about the insured’s health and the purpose of the coverage. Where the insurer requires health questions, the answers can affect the issue and terms of the coverage.

A new owner may need a new application, depending on the insurer’s rules.

The insurer, not NR CPAs & Business Advisors, decides how a change is underwritten. Do not assume a change will be accepted on the same terms as the original policy. Ask the insurer for its written position before the deal closes.

Questions to Settle Before a Sale or Buyout

Settle these questions before anyone requests a change:

1. Who owns the policy now?
2. Who is the beneficiary?
3. What do the buy-sell agreement and business documents say about the policy?
4. What does the policy form allow, and what does the insurer require?
5. What are the tax effects of the transfer?
6. Does the change affect underwriting or the coverage amount?

The answers shape the transfer. The CPA reviews the facts before a change is requested. Fees for a coverage review and for any accounting or tax work are disclosed in writing before an engagement, with all variables stated. If the firm receives a commission on a policy sale, Florida law requires written disclosure to the client (Fla. Stat. § 473.3205).

Owners in these markets can also read our Florida key person guide, Miami key person guide, and Fort Lauderdale key person guide.

Request a Coverage Review Before the Transaction Closes

Before a sale, partner exit, or buyout closes, a coverage review shows whether the policy can move and what must be settled first. The review covers the policy form, the owner and beneficiary lines, and the tax questions that come before the transfer. Nischay Rawal, a licensed insurance agent in Florida, is the responsible agent for this page.

If you’re preparing a buyout and need to know what happens to a key person policy, reach out to us for a coverage review through our contact page.