Protect Your US Company When a Key Leader at Your Indian Subsidiary Is Lost

Under Fla. Stat. § 627.404, a business entity has an insurable interest in the life, body, and health of any of its owners, directors, officers, partners, and managers, or of its key employees or key persons, if consent is obtained in writing from those key employees or persons before the insurance is purchased, and a key employee or key person is an individual whose position or compensation is described in the Internal Revenue Code of 1986. The company is usually the owner, the premium payer and the beneficiary. The executive gives written consent. Key person insurance protects the company’s finances if that person dies. The details depend on the facts: where the insured lives, how the subsidiary is owned and how costs are recorded. This guide walks through those questions in plain words. It covers general points, not a recommendation for any one policy. Indian readers may know this coverage as keyman insurance, so we explain that term too.

Why a US company may insure a key executive who works in India

Key person insurance is a life policy the business owns, pays for and collects on if an essential person dies. The money goes to the company, not directly to the family. It can help offset lost profits, debts the company must repay or the cost of finding a replacement.

Picture a US parent company whose Indian subsidiary depends on one engineer or one regional manager. If that person dies, the parent may face lost sales, loan repayments and recruiting costs. The policy is one way to plan for that loss.

Often the reader is not the insured. A founder may worry about a subsidiary leader’s health. A board may ask how to protect a foreign operation. Either way, start with one question: who has a financial stake in this person’s life?

Who owns, pays for and receives the death benefit

In the usual setup, the US company owns the policy, pays the premiums and is the beneficiary. The insured executive signs a written consent. Keeping these three roles in one company makes the structure easier to explain to the insurer and to a CPA.

Insurable interest is the legal link between the policy owner and the insured. Here is one example. A business may insure a key person of its affiliate or subsidiary when the key person consents in writing before the insurance is bought. The business may not retaliate against someone who refuses. Fla. Stat. § 627.404 requires that, for a policy on another person’s life, no one may procure it unless the benefits are payable to the insured, his or her personal representatives, or a person with an insurable interest when the contract is made.

Which state’s law governs a policy linking a US parent and an Indian subsidiary must be confirmed with the insurer and counsel. Gather proof of the link early. That includes the subsidiary’s ownership, a written description of the executive’s role and the date the consent was signed.

Underwriting an insured who lives and works in India

A fully underwritten key person policy asks health questions. Issue may depend on the insured’s health history and insurability.

The insurer may also ask where the insured lives, travels and works. Those answers can shape the offer. Describe the executive’s actual role and location accurately on the application. An inaccurate application can affect whether a claim is paid.

Ask the insurer how medical exams and records are arranged when the insured is outside the United States. Also ask how the policy treats its early years. Fla. Stat. § 627.455 requires that a life policy become incontestable once it has been in force during the insured’s lifetime for two years from its issue date, except for nonpayment of premiums and other stated exceptions.

Keyman insurance in India and how the terms differ

Keyman insurance is the common Indian name for a policy a company takes on a key employee. The idea is close to US key person insurance. The two are not interchangeable, though.

A US company’s policy is issued under US insurance rules. The insurer, policy form and governing rules may differ from an Indian keyman policy. The Indian subsidiary’s own books and statutory filings may also treat the policy differently. Confirm these points with the insurer and advisers before you assume the two are the same.

The Insurance Information Institute explains that key person life or disability insurance compensates a business for financial losses caused by a key employee’s death or disability. Use the insurer’s own terms in the application, and define each term the first time it appears.

Premiums, tax treatment and the parent-subsidiary accounts

For a US company that is the beneficiary, premiums are generally not deductible. 26 U.S.C. § 264 denies a deduction for premiums on a life policy when the taxpayer is directly or indirectly a beneficiary under it.

Death benefits are generally excluded from gross income. The IRS explains the general exclusion for life insurance proceeds. The rule changes in some cases, such as a transfer for valuable consideration. 26 U.S.C. § 101 limits the excluded amount in that case, with stated exceptions.

The Indian subsidiary’s treatment of premiums paid by the parent, and of any benefit received, follows Indian tax and accounting rules. How the costs are split between the two entities matters too. IRS Form 5472 instructions describe reporting that may apply to certain foreign-owned US corporations with reportable transactions involving a foreign related party. Whether that applies to your structure is a question for your CPA.

A CPA would ask for the policy, the premium schedule and the intercompany agreement together. That way, the books match the policy’s terms.

Employer-owned life insurance notice and consent

US rules on employer-owned life insurance tie certain tax treatment to notice and written consent. The insured must consent in writing to being insured. The consent must also say coverage may continue after employment ends. Under the federal tax rules for employer-owned life insurance contracts, the policyholder’s tax-free amount of death proceeds is generally capped at the premiums and other amounts it paid, but that cap does not apply in certain cases when the notice and consent requirements are met.

26 U.S.C. § 6039I adds an annual reporting duty. Each applicable policyholder owning one or more employer-owned life insurance contracts issued after the date of the enactment of this section must file a return showing items such as the number of employees, the number insured, the total insurance in force and whether each insured employee gave valid consent. Each applicable policyholder owning one or more employer-owned life insurance contracts during any year must keep records as may be necessary to determine whether the requirements of § 6039I and section 101(j) are met.

Keep the signed consent, the notice, the application and the ownership records for each insured executive. Ask counsel how these rules apply to an executive who works in India.

Coverage amount, term length and changing roles

The coverage amount usually follows the financial loss the company expects if the executive dies. That may include lost profit, debt the company must repay or the cost of recruiting and training a replacement. Build the figure from the company’s own numbers.

Term length should match the years the executive is expected to be essential. A term policy covers a set period. The subsidiary’s business plan may run longer or shorter than that period.

If the policy is permanent, ask how it meets the tests in 26 U.S.C. § 7702 to count as life insurance for tax purposes. A policy funded faster than the 7-pay test allows can become a modified endowment contract under 26 U.S.C. § 7702A.

Roles change. If the executive moves between the US and India, changes role or leaves the subsidiary, contact NR CPAs & Business Advisors to schedule a coverage review covering the ownership, beneficiary and coverage.

Who we are and a coverage review for your situation

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals and business owners, including Indian-American households and business owners, choose and buy life insurance. The firm brings a CPA’s view of tax and cash flow to those decisions.

Insurance is offered by Nischay Rawal as a licensed insurance agent, separately from the firm’s accounting practice. Insurance is offered by the licensed agent, separately from the accounting practice, and the agent’s insurance sales are commission-based. Where the firm accepts a commission for the sale of a product or service to a client, the firm discloses it to the client in writing, as Fla. Stat. § 473.3205 requires.

The first meeting with the firm is a coverage review. Fees are explained in writing before any engagement. If a key executive’s location and role are central to your company’s plans, request a coverage review with our team.

Frequently asked questions