Plan for the Business Partner Your Company Depends On

Term key person life insurance is a term life insurance policy that a business owns on one person whose loss would hurt the company. If that person dies during the term, the business receives the death benefit. It fits when a known business risk has an end date, such as a loan repayment period or a leadership transition.

What term key person life insurance is and who it is for

Term key person life insurance pays the business, not the family, when a named key person dies during a fixed term. The Insurance Information Institute describes key person life insurance as compensation for a business’s financial losses caused by a key employee’s death or disability.

A key person is someone the business relies on. That might be an owner, a top salesperson, a technical lead, or someone who personally guarantees a business loan. Because the money is meant to offset business losses, the business is usually the policy owner and beneficiary.

This coverage often fits three situations:

• A bank loan with a fixed repayment period that depends on one owner’s continued role.
• A planned leadership transition that will take several years.
• A contract or client relationship that depends on one person’s skills.

Term key person coverage is a term life insurance policy. It is not an investment, a savings plan or a retirement plan.

What the policy covers and what is included

Each policy has a few core parts. You should understand them before you apply.

• Death benefit: the amount the insurer pays if the insured dies during the term.
• Term length: the number of years coverage stays in force.
• Insured person, policy owner and beneficiary: these can be different parties. Under Fla. Stat. § 627.404, a policy on another person’s life may pay benefits only to the insured, the insured’s personal representatives, or a person who had an insurable interest in the insured when the contract was made.
• Premium schedule: how often premiums are due and how long they are payable.

The business decides how to use the proceeds. Some businesses use them to cover lost revenue, recruit a replacement, or repay business debt. No policy promises any particular result.

Coverage ends when the term ends. Some forms allow renewal or conversion. Premiums can change with age at renewal, depending on the form. Ask the insurer to confirm these terms in writing.

Florida law sets some baseline rules. Every insurance contract must allow a grace period of not less than 30 days for paying any premium after the first, under Fla. Stat. § 627.453. Every life insurance contract must provide that the policy becomes incontestable after it has been in force during the insured’s lifetime for 2 years from its date of issue, except for nonpayment of premiums and, at the insurer’s option, provisions on disability benefits and provisions granting additional insurance specifically against death by accident or accidental means, under Fla. Stat. § 627.455. Incontestability does not stop an insurer from relying on policy exclusions or restrictions, under Fla. Stat. § 627.463.

Term versus whole life for key person coverage

Term coverage protects a defined window. Whole life insurance is permanent. The right choice depends on how long the business risk lasts.

Whole life illustrations need care. Cash values and any dividends are not guaranteed to any particular amount. If an illustration shows guaranteed and non-guaranteed values, read them separately.

Match the term length to the repayment schedule or transition timeline. If the need runs longer or has no end date, a permanent policy may be the better comparison. The NAIC Life Insurance Buyer’s Guide covers term versus permanent life insurance and the questions to ask before buying.

How the process works from first call to issued policy

You start with a coverage review. The application, underwriting and policy delivery follow.

1. Coverage review. Call the firm and describe the business, the key person’s role, and the exposure period. Cover why coverage is needed, the amount tied to a documented exposure, who owns the policy, and which term fits.
2. Written consent. Under Fla. Stat. § 627.404, a business may insure an owner, officer or key person when that person consents in writing before the policy is bought. The business may not retaliate against a key employee or key person who refuses to consent to the insurance.
3. Application and health questions. Health questions are required, and issue may depend on insurability.
4. Underwriting and delivery. The insurer reviews the file and then issues the policy. Ask the insurer for the return period for a new policy in writing. The Florida Department of Financial Services guide covers that topic. Timing varies by insurer and file, so ask for the insurer’s estimate in writing.

Limits, premium obligations and questions to ask before you buy

The business pays the premiums for the whole term. If a premium is late, the policy stays in force during the grace period. The insurer may charge interest, up to 8 percent per year, under Fla. Stat. § 627.453. Missed payments after that can end coverage, so budget for every year of the term.

Tax treatment matters. Under 26 U.S.C. § 264, no deduction is allowed for premiums on a life policy when the taxpayer is directly or indirectly a beneficiary. For a business that is the beneficiary, premiums are generally not deductible. Under 26 U.S.C. § 101, amounts paid because of the insured’s death are generally excluded from gross income. For an employer-owned life insurance contract, however, section 101(j) sets a general rule that the amount an applicable policyholder may exclude cannot exceed the sum of the premiums and other amounts paid by the policyholder for the contract, unless one of the statute’s exceptions applies. Those exceptions include contracts that meet the notice and consent requirements where the insured fits certain categories, and proceeds paid to the insured’s family member, a designated beneficiary, or the insured’s estate.

Employer-owned policies can carry extra duties. Under 26 U.S.C. § 6039I, an applicable policyholder owning employer-owned life insurance contracts issued after the date of enactment of this section (August 17, 2006) must file an annual return and keep records for these contracts.

How these rules apply depends on the facts, the policy owner and the business entity. Review them with the firm before you buy.

Bring these questions to your coverage review:

• How long is the loan or transition timeline?
• What happens at term expiry, and does the form allow renewal or conversion?
• Who owns the policy and who pays the premiums?
• Has written consent been obtained from the key person?

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 key person and buy-sell coverage, with a CPA’s view of tax and cash flow.

Our team looks at how the insurance decision fits the business’s cash flow and tax picture. That view informs the decision. The policy terms still come from the insurer’s policy form.

Nischay Rawal is the responsible agent for this page. Insurance is offered through Nischay Rawal, a licensed insurance agent, separately from the firm’s accounting practice. Under Fla. Stat. § 626.112, an insurance agent must be currently licensed and appointed. Fla. Stat. § 626.112 reads: “(1)(a) No person may be, act as, or advertise or hold himself or herself out to be an insurance agent, insurance adjuster, or customer representative unless he or she is currently licensed by the department and appointed by an appropriate appointing entity or person.”

Frequently asked questions and your next step