Plan Who Owns Your Key Person Policy, With a CPA's View

Transferring ownership of a key person life insurance policy is possible, but the tax and policy steps come first. Moving a policy to an employee, a partner or a trust can change how the death benefit is taxed. This page walks through those steps in plain words, so you can review them before anything is signed.

What a Key Person Policy Is and When Ownership Transfers Come Up

Key person life insurance is a policy a business owns on someone whose death would cost the company money. The business pays the premiums, owns the policy and receives the death benefit. The benefit can help cover lost revenue, the cost of finding and training a replacement, or debts the company still owes. The Insurance Information Institute describes key person coverage as compensation for a business’s financial losses from the death or disability of a key employee.

Ownership transfers usually come up at succession moments:

• An owner or key employee retires.
• A partner leaves the business.
• An employee moves into a bigger role.
• The buy-sell agreement gets rewritten.

Three roles matter. The owner controls the policy. The insured is the person whose life is covered. The beneficiary receives the death benefit. These can be three different people or entities, so a change to any one of them needs review.

The Transfer-for-Value Rule in Plain Words

The transfer-for-value rule can reduce the tax-free part of a death benefit when a policy is sold or handed over for something of value. When a policy transfers for valuable consideration, though, the excluded amount is capped. The cap equals the actual value of what was paid, plus the premiums and other amounts the new owner pays later.

The cap does not apply where the transferee’s basis is determined by reference to the transferor’s basis, or where the transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer:

• A transfer to the insured.
• A transfer to a partner of the insured.
• A transfer to a partnership in which the insured is a partner.
• A transfer to a corporation in which the insured is a shareholder or officer.

A gift of a policy to a family member, where the family member’s basis is figured in whole or in part by reference to the giver’s basis, can fall under the carryover-basis exception in IRC § 101(a)(2)(A); a sale for value generally does not, so review it before assuming the exclusion is kept or lost. A transfer to an employee is not on the list by job title alone. Whether any transfer creates tax depends on the facts. A CPA reviews the exact terms before anything changes hands.

Ways Ownership Can Move: To the Insured, Another Individual, or a Trust

Ownership can move to the insured, to an employee or partner, or to an irrevocable trust. Each path has different review items.

• To the insured. This path is on the exception list, so the cap does not apply under that rule. The other review steps still apply.
• To an employee or partner. The price, the written agreement and the transfer-for-value review all matter. Unless the person fits an exception, the cap may apply.
• To an irrevocable trust. Trust ownership can change estate treatment. Under IRC § 2042, insurance receivable by other beneficiaries can be part of the estate if the decedent held incidents of ownership at death. IRC § 2042 reads: “For purposes of the preceding sentence, the term “incident of ownership” includes a reversionary interest (whether arising by the express terms of the policy or other instrument or by operation of law) only if the value of such reversionary interest exceeded 5 percent of the value of the policy immediately before the death of the decedent.” Under IRC § 2035, certain transfers made within three years of death can be added back to the estate.

For 2026, the basic exclusion amount for estate and gift tax is $15,000,000, per the IRS revenue procedure.

Policy-Form and Insurer Steps You Cannot Skip

A transfer is not complete until the insurer records the new owner on its own forms. The insurer’s paperwork controls the change, not a handshake or a memo.

• Ask the insurer which ownership change or assignment form it requires. An assignment hands the policy owner’s rights to someone else.
• Get written confirmation from the insurer that the new owner is on record.
• Check the beneficiary designation against the business agreement and the new ownership plan.
• Review the cash value, any policy loan and any riders. These move with the policy and can affect the transfer.

The NAIC life insurance buyer’s guide covers riders and questions to ask before buying, which helps when you read the policy.

Step-by-Step Process and What to Expect

A careful transfer follows five steps in order. Each step feeds the next.

1. Gather the policy, the buy-sell or business agreement, and the latest policy statement.
2. Identify which transfer-for-value exception applies, if any, and write down the reason for the transfer.
3. Set the transfer price and payment terms in writing, with the CPA reviewing the tax effects.
4. Complete the insurer’s forms and confirm the insurer’s record of the new owner.
5. Update business records, beneficiary designations and tax reporting after the insurer confirms the change.

How long each step takes depends on the insurer’s processing and how complex the agreement is.

Tax and Reporting Questions to Settle with Your CPA

Your CPA should settle the price, the reporting and the buy-sell fit before the policy changes hands.

• Price. Set and document any amount paid, in writing.
• Reporting. Confirm how the transfer and later premiums appear on the business’s returns. See our key person insurance tax reporting guide. Some employer-owned policies also carry federal filing duties under IRC § 6039I.
• Buy-sell fit. Check whether the agreement needs amendment. For partnerships, Fla. Stat. § 620.8701 covers buyouts of a departing partner when the departure does not result in dissolution and winding up of the partnership business.
• Timing. Settle these items before signing, so the agreement and the policy match on the transfer date.

Why NR CPAs & Business Advisors for This Review

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

• Nischay Rawal is the responsible agent on this page and acts as a licensed insurance agent. Under Fla. Stat. § 626.112, only a currently licensed and appointed agent may act as an insurance agent. 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.”
• Insurance is offered by the licensed agent, separately from the accounting practice.
• If the firm accepts a commission on a policy, it discloses that to the client in writing, as Fla. Stat. § 473.3205 requires.
• A coverage review is the first meeting. Our team reviews the policy, the business agreement and the tax questions together.
• For more on how the pieces fit, read our buy-sell agreement life insurance guide.

Frequently Asked Questions