Who Pays Key Person Insurance Premiums? Books and Tax

Usually, the business pays the premium on a key person policy. The company owns the policy, pays the premium, and receives the death benefit. That setup is common, but it isn’t the only one.

What Key Person Insurance Is and Why the Premium Question Matters

Key person insurance is life insurance a business owns on someone whose death would hurt the company. That person is often a founder, an officer, or a top producer the business depends on.

Every policy involves three roles:

• Policy owner: the person or entity that controls the policy.
• Premium payer: the person or entity that pays each premium.
• Beneficiary: the person or entity that receives the death benefit.

These roles can sit with different parties. Each mismatch changes the books and the tax reporting.

Florida law sets a condition on the business side. A business can insure a key person only if that person consents in writing before the policy is bought. Fla. Stat. § 627.404 also bars the business from punishing a key person who says no. Under federal law, death benefits generally are not gross income. 26 U.S.C. § 101(a) states that general rule.

Option One: The Company Pays the Premium

When the company owns the policy, pays the premium, and is the beneficiary, the premium is a company cost. The bookkeeper records each payment based on the policy type.

Term life insurance covers a set period and builds no cash value. Most bookkeepers record term premiums as an expense in the period paid.

Permanent coverage, such as whole life insurance, works differently. Part of each premium builds cash value. That cash value is an asset on the balance sheet, not an expense. The insurer’s annual statement shows how much value has built up, and the books should match it.

Two policies with the same yearly premium can produce different entries. One may go entirely to expense, while the other is split between expense and an asset. The exact entries depend on the facts, including the policy’s design and how the company tracks it.

Tax Treatment of Company-Paid Premiums

In most company-owned key person cases, the company cannot deduct the premium. Federal law disallows a deduction for life policy premiums when the taxpayer is directly or indirectly a beneficiary. IRC § 264(a)(1) sets out that rule.

Many owners misunderstand this point. A premium that isn’t deductible still has to be recorded correctly. Keep that amount separate from ordinary business expenses so the return matches the ledger.

Federal reporting can add a second layer. For certain employer-owned life insurance contracts, the policyholder must file a return. That return shows the number of employees, how many are insured, the total coverage in force, the policyholder’s name, address, taxpayer identification number, and type of business, and whether each insured employee has valid consent (or how many do not). The policyholder must also keep the records needed to show whether the requirements of this reporting rule and IRC § 101(j), including valid consent, are met. IRC § 6039I sets out those duties.

The same premium can look different on the books and on the tax return. Track both views from the first payment. Rebuilding them at tax time is harder and more error-prone.

Option Two: The Owner Pays the Premium Personally

When the owner pays the premium from personal funds, the premium stays off the company’s books. The company should not record that payment as its own expense. Doing so mixes personal money with business money.

A common variation is the company paying first and repaying the owner later. Each flow needs a paper trail. Keep a written agreement or a board or shareholder resolution. Keep the bank record for every payment.

Repayments can carry different reporting. A payment may be treated as compensation, a shareholder contribution, or a loan from the owner. Each treatment has its own reporting rules. Settle the category before the first payment, not after the return is filed.

Ownership matters too. If the owner holds the policy personally, the owner controls it and names the beneficiary. Those choices should match what the company intends.

Cash Surrender Value, Policy Loans, and Year-End Reporting

Cash surrender value is the amount a permanent policy would pay if the policyholder ended it. The insurer’s annual statement shows this figure. The year-end entry should match it.

Keep guaranteed and non-guaranteed values separate. Guaranteed values are stated in the policy. Non-guaranteed figures, including projections, are not guaranteed. A dividend, where a policy pays one, is not guaranteed either. Books and summaries should say so.

Policy loans change the picture. The loan is limited to the policy’s loan value. Fla. Stat. § 627.458 sets out those rules. A loan lowers the net value the company can claim, so track the loan balance and any interest each year.

Watch the notice rule too. If total debt on the policy equals or exceeds the loan value, the policy may end. The insurer must mail at least 30 days’ notice first. That loan provision does not apply to term policies.

Building a Clean Bookkeeping File for the Policy

A clean file answers three questions: who paid, for what, and where it was recorded. Start with these documents:

• the policy form and the application
• the beneficiary designation
• board or shareholder approvals
• the key person’s signed written consent
• each premium invoice and proof of payment

Keep the signed consent on file. Florida requires it before the policy is bought, so a missing form is a real gap. Fla. Stat. § 627.404 sets that requirement for individual policies: the insured must apply for or consent in writing on or before the time the contract is entered. Prepaid funeral contracts, group life, and group or blanket accident, health, or disability policies are excluded.

Next, build a premium ledger. Each line should show the date, the amount, who paid, which account received the entry, and any reimbursement. Name the policy owner and the beneficiary on every line. The file should make sense without the paper policy in hand.

Before the year closes, compare the ledger with the insurer’s statements. Mismatches are easier to fix in the same year than years later.

What Changes If the Key Employee Leaves or the Business Is Sold

A departure or a sale can change who owns the policy and who should pay the next premium. Plan these changes before they happen.

If a key employee leaves, the company may keep the policy, cancel it, or transfer it. The key employee departure guide covers those options in more detail.

Transfers have their own consequences. Federal law limits the tax exclusion when a life policy is transferred for valuable consideration. IRC § 101 sets that limit. The company sale ownership guide explains the ownership side.

Buy-sell arrangements are reviewed separately. They can use life insurance to fund a buy-out. Plan the policy and the agreement together, and before any transfer.

Schedule a Coverage Review to Settle Who Pays

If you’re setting up a key person policy or sorting out old premium entries, start with a coverage review. Owners who paid premiums without a clear record of whose money paid them can find the books hard to untangle. A bookkeeper asked to record a new policy faces the same question.

Contact NR CPAs & Business Advisors to schedule a coverage review of the policy, the ownership setup, and the bookkeeping plan.

Insurance is offered by Nischay Rawal, a licensed insurance agent in Florida. Insurance is offered separately from the firm’s accounting practice.

Frequently Asked Questions