Key Person Life Insurance, Reviewed Against Your Business's Real Numbers

Key person life insurance is a policy a business owns on the life of an owner or key employee. A key person life insurance coverage review checks whether that policy still fits the company’s real exposure, its ownership setup, its buy-sell terms and its tax treatment. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice of NR CPAs & Business Advisors. Here’s what to check before you decide.

What key person life insurance is and who it is for

Key person life insurance pays the business when a key owner or employee dies. The Insurance Information Institute describes it as coverage that compensates a business for financial losses caused by a key employee’s death or disability.

Who is usually covered? Founders, majority owners, top sales or technical leaders, and people whose relationships support lending or major customer accounts.

Key person coverage is not personal life insurance. An individual buys personal coverage for family. The business owns key person coverage and holds the benefit. It also differs from buy-sell insurance, which funds the purchase of an owner’s share. The two can work together, but they address different losses.

This fits closely held C corporations, S corporations, LLCs and family businesses where a few people carry most of the work. If one or two people are the company, the risk is real and worth reviewing.

What a coverage review examines

A coverage review starts with the amount. The face amount should tie to documented losses, such as lost profits, hiring and training costs for a replacement, and loan terms. The review tests those assumptions. It does not promise any result.

Next comes the insured person. Roles and ownership change over time. A policy written for a founder may not fit the leaders who run the company today.

Then the review looks at ownership and beneficiary. Who owns the policy, who pays premiums and who collects the death benefit? That setup decides who controls the policy if an owner leaves.

Policy type matters too. The NAIC Life Insurance Buyer’s Guide explains the differences between term and permanent life insurance, plus questions to ask before buying. For whole life, the review shows guaranteed and non-guaranteed values separately.

Finally, the review lists each policy in force. That includes the insurer, policy form number, face amount, premium, renewal terms and any age-based change.

Tax and cash flow: what a CPA reviews

Premiums are generally not deductible when the business is a beneficiary (26 U.S.C. § 264). So the real cost is the full premium paid from company cash, year after year. The review puts that cost beside each option.

The death benefit is generally excluded from gross income under 26 U.S.C. § 101, with exceptions. One exception is the transfer-for-value rule, so moving a policy between owners needs care. Interest the insurer pays on proceeds it holds is taxable.

If the business is an applicable policyholder owning employer-owned life insurance contracts issued after the date of enactment of this section, 26 U.S.C. § 6039I requires a return. That return shows how many employees are insured and whether each one consented.

Whole life policies can be borrowed against. A loan can reduce what the beneficiary receives, so the review models it against cash flow.

How a coverage review works, step by step

A coverage review follows five steps. The timing depends on how fast documents arrive and how many owners must agree.

1. Start the conversation. Contact the firm and describe the business, its owners and any policy already in force.
2. Gather documents. The firm asks for existing policy illustrations, the buy-sell or shareholder agreement, and recent financial statements.
3. Review the setup. The team checks the amount, insured persons, ownership, beneficiary, buy-sell link and tax treatment against your records. Florida’s insurable-interest rules call for written consent from the key person before the purchase (Fla. Stat. § 627.404).
4. Get the options in writing. The licensed agent explains each option in plain words, with its limitations and exclusions.
5. Decide. Any fee for the coverage review is explained in writing, with all its variables, before work begins. You decide whether to go ahead.

Why 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. That includes Indian-American households and business owners and NRI owners with similar ownership and tax questions.

The firm’s view starts with accounting. A premium alone does not show whether coverage fits. The review ties the insurance decision to the company’s tax position, cash flow and ownership documents.

Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the firm’s accounting practice. Our team handles document collection and follow-up, so the owner can focus on the decision.

Questions owners ask before they decide

Protect the business and the people who depend on it

If your company relies on one or two people, your buy-sell agreement has not been reviewed in a while, or your policy was bought years ago, a coverage review can help. The goal is to protect your family and the business you built. It is a goal, not a promised result. Contact NR CPAs & Business Advisors to ask about a coverage review, or call us today.