Key Person Insurance for a U.S. Subsidiary of an Indian Parent

Key person insurance is a life insurance policy that a company owns on a key employee. The company pays the premiums and receives the benefit, not the employee’s family. This guide explains key person insurance US subsidiary of Indian company structures in plain words, including who qualifies and what to expect from a coverage review.

What key person insurance is and who it is for

Key person insurance is a company-owned policy on a leader whose death or disability would hurt the business. The Insurance Information Institute explains that it compensates a business for financial losses caused by a key employee’s death or disability.

It often fits three groups:

• US subsidiaries of Indian parent companies
• NRI and Indian-American business owners
• Privately held companies that depend on a few critical people

The main difference from personal life insurance is who benefits. With personal coverage, the family receives the death benefit. With key person coverage, the company is the owner and beneficiary. Term and whole life policies can both be used. The right type depends on the company’s goals and the policy’s terms.

Identifying the key employees in a US subsidiary

A key employee is someone whose loss would disrupt revenue, contracts or licenses. Under Florida law, a key employee or key person means an individual whose position or compensation is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code of 1986. Start by listing the people whose absence would be hardest to cover. Start by listing the people whose absence would be hardest to cover.

Roles often considered:

• The US chief executive or managing director
• The head of sales or operations
• The chief financial officer or controller
• Technical leaders tied to key clients or licenses

Leaders sent from the parent company on work visas can still qualify. What matters is their role in the US business and what the company would lose without them. Florida law ties the term “key person” to the federal definition, which looks at a person’s position or compensation (Fla. Stat. § 627.404).

Before a coverage review, answer three questions:

• Which revenue, contracts or relationships depend on this person?
• How long would it take to replace them?
• What would recruiting and training a replacement cost?

Write down the answers. They show the company’s real exposure and help size the policy.

What the policy covers and how the proceeds can be used

The death benefit is paid to the company, which decides how to use it. Common uses include covering lost revenue, recruiting and training a replacement, and paying business debts.

The IRS says life insurance death benefits are generally not taxable. Interest paid on the proceeds is taxable (IRS).

Premiums are a separate question. Which rule applies depends on the facts.

Disability benefits are not in every policy. Only policies that provide them include them, so read the limits and exclusions.

Two policy types work differently:

• Term life covers the insured for a set period.
• Whole life covers the insured for life and builds cash value. Its cash value has guaranteed and non-guaranteed parts. Dividends, if any, are not guaranteed.

Every benefit comes with limits. Ask about exclusions, age-based changes, and the health questions that affect whether the policy is issued.

Ownership, beneficiary and employee consent

Usually the company owns the policy and is the beneficiary, and the key employee is the insured. Florida law lets a business insure a key employee only with written consent. The consent must come before the insurance is bought (Fla. Stat. § 627.404).

The law also says the business entity or its affiliate or subsidiary may not retaliate or take adverse action against any key employee or key person who does not consent (Fla. Stat. § 627.404). A common mistake is skipping this step and filing the paperwork later. Keep the signed consent in company records before the application goes in.

Ownership can change. A policy can sometimes be transferred when a key employee leaves or ownership changes. The policy terms and the rules that apply control that step.

Tax reporting also matters. Federal tax law generally limits the tax exclusion for these policies to the premiums and other amounts the policyholder paid, subject to exceptions under IRC Section 101(j).

How the process works, step by step

The process moves from a coverage review to underwriting, then to an annual check. Each step builds on the one before.

1. Coverage review. We review the company’s structure, its key people and the parent company’s goals.
2. Policy type and face amount. Choose the policy type and benefit amount based on the business case and the company’s budget.
3. Application and health questions. Health questions are required. Issue may depend on insurability.
4. Underwriting and issue. The insurer sets the timing, and each case differs. Florida law says a life policy must be incontestable after it has been in force during the insured’s lifetime for 2 years from its issue date. The exceptions are nonpayment of premiums and, at the insurer’s option, disability and accidental-death provisions (Fla. Stat. § 627.455).
5. Annual review. Check the coverage again as roles, revenue and ownership change.

Why work with NR CPAs & Business Advisors

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals and business owners across the United States choose and buy life insurance, including key person coverage. That includes Indian-American households and business owners.

• Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice.
• The firm brings a CPA’s view of tax, cash flow and how proceeds are recorded.
• The coverage review looks at the insurance and the company’s books together.
• Our team supports the process from the first meeting through the annual check.

Common questions about key person insurance for a US subsidiary