Key Person Insurance vs Employee Life Benefit: Who Owns the Coverage?

Key person insurance vs employee life benefit comes down to one question: who owns the policy and who gets paid. A key person policy is owned by the business, and the business is the beneficiary. A group life benefit is coverage an employer offers its workers, and the employee names the person who receives the money.

Maybe you are reading this because a key employee left, got sick, or a benefits statement raised questions. Both policies involve life insurance and often the same employer, so they are easy to mix up. This guide explains how each one works, what happens when someone changes jobs, and the tax points a CPA reviews. It is general education. Your own facts decide which coverage fits.

Two Policies, Two Different Jobs

The key person policy protects the business’s finances, while the group benefit protects the employee’s chosen beneficiaries.

Key person insurance is life insurance a business buys on an owner or employee whose death would hurt the company; under Florida law, the business needs that person’s written consent before the insurance is purchased. The business pays the premium, owns the policy, and receives the death benefit. The Insurance Information Institute explains that key person life insurance compensates a business for financial losses caused by a key employee’s death or disability.

The employee is the insured. The employee usually names a personal beneficiary, such as a spouse or child. So the money usually goes to the family, not the company.

The two can exist side by side. They often leave different gaps. The rest of this page shows where. For the full picture of business-owned coverage, see our key person insurance guide.

How Key Person Insurance Works for the Business

The business is the owner and beneficiary, the key person is the insured, and the insurer named in the contract issues the policy.

Each role should appear in the policy paperwork. Check the policy owner, the beneficiary, and the insured’s name before you sign anything.

Florida law also sets rules for who may insure whom. A business entity has an insurable interest in the life of its owners, directors, officers, partners, managers, and key employees or key persons, or of any affiliate or subsidiary of the business entity. That interest requires written consent from the person before the policy is bought. That interest requires written consent from the person before the policy is bought. Fla. Stat. § 627.404 also bars the business from retaliating against any key employee or key person who refuses consent to the insurance. Skipping the written step is a common mistake.

What the business does with the money is its own decision. Some businesses use proceeds to cover lost revenue, recruit and train a replacement, or meet debt obligations. The policy does not promise any particular result.

Cost is set by the insured’s age, health, the coverage amount, and underwriting. Health questions usually apply, and the insurer may decide the issue based on the answers. A coverage review is the way to tie numbers to your facts.

What a Group Life Benefit Covers and Who It Protects

A group life benefit covers the employee, and the employee chooses who receives the death benefit.

The employer usually pays all or part of the cost. Coverage is often set as a multiple of salary, and the plan may cap the amount. The plan documents control the amount, the limits, and the claim steps. Ask HR for the plan summary and the certificate that shows your coverage.

Group coverage is one employer’s plan for its employees. The business does not use it to fund its own losses. When the insured dies, the named beneficiary receives the proceeds.

Beneficiary choice matters under Florida law too. For a Florida resident who dies, Fla. Stat. § 222.13 says insurance payable to a designated beneficiary is exempt from the insured’s creditors. That rule does not apply if the policy or a valid assignment provides otherwise. If the proceeds are payable to the insured’s estate, they become part of that estate. Fla. Stat. § 222.13 reads: “Notwithstanding the foregoing, whenever the insurance, by designation or otherwise, is payable to the insured or to the insured’s estate or to his or her executors, administrators, or assigns, the insurance proceeds shall become a part of the insured’s estate for all purposes and shall be administered by the personal representative of the estate of the insured in accordance with the probate laws of the state in like manner as other assets of the insured’s estate.”

What Happens to Employee Life Insurance When You Leave

Group coverage often ends when employment ends, unless the plan offers a conversion or portability option.

Ask the plan administrator in writing when coverage stops. Conversion or portability rights usually carry deadlines and conditions set by the plan. A missed deadline can end the chance to keep the coverage.

A key person policy works differently. The business owns it, so the policy stays with the business under its contract terms. Florida law says the insurable interest “need not exist after the inception date of coverage” under the contract (Fla. Stat. § 627.404). The policy still needs premiums paid and its terms met.

Under Florida law, the policy remains in force during the grace period for an overdue premium, and that grace period must be at least 30 days (Fla. Stat. § 627.453). Mark your premium dates anyway.

If a key person moves to a different role, the business may need to revisit the policy. See our change-in-role guide.

Tax Treatment: Premiums, Proceeds, and Imputed Income

Death benefits are generally excluded from income, but the cost of employer-paid group-term life insurance is included in the employee’s gross income only to the extent it exceeds the exclusions in section 79.

The IRS states that federal law generally excludes life insurance death benefits from gross income. Section 79 addresses the cost of group-term life insurance included in an employee’s gross income and does not address interest paid on insurance proceeds (Internal Revenue Service). The rules for proceeds sit in 26 U.S.C. § 101. That section also has an exception for employer-owned contracts. The exception requires that the employee be notified in writing that the policyholder intends to insure the employee’s life and of the maximum face amount, give written consent to being insured (coverage may continue after employment ends), and be informed in writing that the policyholder will be a beneficiary.

If the plan discriminates in favor of key employees, though, key employees do not get the $50,000 exclusion. If the plan discriminates in favor of key employees, though, key employees do not get the $50,000 exclusion. The cost is figured with uniform premiums computed by 5-year age brackets. That taxable amount is often called imputed income.

Borrowing adds another tax question. 26 U.S.C. § 264 denies a deduction for any amount paid or accrued on debt used to buy a life insurance contract (other than a single premium contract) under a plan of systematic borrowing against cash value increases, subject to the exceptions in subsection (d). Ask before taking any policy loan.

Whether the business can deduct premiums turns on the policy, who owns it, and how the business is set up. Our accounting practice reviews these points against your own records.

When a Business Owner Has Both Coverages

A business owner can have group coverage through an employer and also be the insured on a key person policy the company owns. Each one leaves different gaps.

The group benefit is usually sized to salary. That amount may not match the business’s debts or the cost of replacing the owner. The key person policy pays the business, not the owner’s family. So the family may still need its own personal coverage.

A buy-sell agreement can sometimes be funded with life insurance. That is a separate planning question tied to the ownership documents. Florida law allows a party to a contract for the purchase or sale of a business interest to have an insurable interest in the life of each other party, for that contract only (Fla. Stat. § 627.404).

Review both coverages together. Do not assume one replaces the other.

Term or Permanent Coverage: What Changes Over Time

Term coverage lasts for a set period, while whole life insurance is built to last for life if its premium and policy terms are met.

The Financial Industry Regulatory Authority describes term life as coverage for a limited period. Whole or permanent life provides lifetime coverage and a cash-value feature.

With term, the level premium period ends and renewal terms follow. Read the renewal terms and any age-based change in the policy before you rely on it past the level period.

A whole life policy may show cash value and may pay dividends. Dividends are not guaranteed. The policy makes no promise of returns or profits.

Term often fits a set period, such as until a key person is expected to retire. Permanent coverage often fits a longer need. The right choice depends on your facts.

Questions to Answer Before You Decide

Start with these questions: who is insured, who owns the policy, who is the beneficiary, who pays the premium, and what happens if the insured leaves.

• Who is the insured?
• Who owns the policy?
• Who is the beneficiary?
• Who pays the premium?
• What happens to coverage if the insured leaves the company?
• Is the group benefit portable or convertible, and what are its limits?
• Does the business have documented debts or obligations the proceeds would need to cover?

Ask how the insured’s health affects issue and price. Health questions and underwriting may apply to any policy.

Florida owners and families can also review our Florida key person page and Miami page.

Frequently Asked Questions

Talking Through Your Situation With NR CPAs

If you are sorting out who is covered and who gets paid, a coverage review can start with the facts.

A key employee may have stepped back. An owner’s health may have changed. A benefits statement may show coverage you did not expect. Any of these can leave a business and a family with hard questions.

Contact NR CPAs & Business Advisors to set up a coverage review with Nischay Rawal. The firm charges for a coverage review, and its fees are explained before any engagement.

Nischay Rawal is a licensed insurance agent. Insurance is offered through him separately from the firm’s accounting practice. Commissions on insurance products are disclosed in writing before any engagement.