Protect the business you have built and the people who depend on it

What Key Person Insurance Is and Why the Checklist Matters

Key person insurance is a life insurance policy that a business buys on a key employee, with the business named as beneficiary. Before you buy, you should check what should I check before buying key person insurance: insurable interest, coverage size, ownership, tax effects, policy structure, underwriting, and how the agent is paid.

The Insurance Information Institute explains that key person coverage compensates a business for financial losses caused by an employee’s death or disability. That is the purpose. The policy pays the business, not the employee and not the employee’s family automatically. The business decides how to use the money.

This checklist is for owners who already think a policy may fit. It does not tell you to buy. It helps you ask the right questions before you review a specific policy from a named insurer. Business owners considering life insurance for their company may want to start with a few basic questions.

Confirm the Key Employee and the Insurable Interest

Start by confirming that the business has a legal reason to insure this person. Florida calls this an insurable interest. A key employee is someone whose loss would hit revenue, daily operations, or relationships with lenders and clients.

Florida law ties the business’s interest to written consent. Under Fla. Stat. § 627.404, a business has an insurable interest in a key employee or key person if that person consents in writing before the insurance is bought. The business may not retaliate against a key employee who says no.

The statute also says the insurable interest need not exist after coverage starts. Ask the agent to confirm how the consent was documented. Keep the signed copy with the policy file. The insurer makes the final call on eligibility under its own underwriting rules, so ask about those rules early.

Size the Coverage to the Business Impact

Size the death benefit to a loss you can estimate on paper. A round number is not a plan. Start with the costs the business would face during the transition.

Common items include lost profit while the company adjusts, the cost of recruiting and training a replacement, and any loan covenant or lender requirement tied to that person. Write each estimate down with the assumption behind it. Then total the figures.

Treat the result as a planning estimate. Review it when the person’s role, pay, or the company’s debt changes. A larger death benefit generally means a higher premium, so tie the amount to a need you can document.

Check Ownership, Premium Payer, and Beneficiary Design

Ownership decides who controls the policy, who pays the premium, and who receives the money. Most businesses are both the owner and the beneficiary. The insured person is the employee.

Confirm which company account pays the premium. Record the payment source in the company’s books. This matters because it links the policy to cash flow and to the tax rules below.

Now the tax points. Under 26 U.S.C. § 264, no deduction is allowed for premiums on a life insurance policy if the taxpayer is directly or indirectly a beneficiary under the policy. For a key person policy, the business is usually that beneficiary, so premiums are generally not deductible.

The death benefit is generally excluded from gross income under 26 U.S.C. § 101(a). Interest paid on proceeds left with the insurer is a separate issue. Under IRC § 101(j), for an employer-owned life insurance contract, the amount an applicable policyholder may exclude from gross income under § 101(a)(1) may not exceed the sum of the premiums and other amounts paid by the policyholder for the contract. Certain exceptions apply only when the written notice and consent requirements of § 101(j)(4) are met before the contract is issued. Confirm these points with your own tax advisor.

Compare Term and Permanent Structures Over Time

Term coverage lasts for a set period. Whole life coverage can last for the insured person’s life, as long as the premiums are paid under the policy terms. The NAIC Life Insurance Buyer’s Guide explains the difference between term and permanent life insurance.

Ask how long the business needs protection. A term policy may fit a defined transition, such as a planned succession. A permanent policy may fit a longer need. Ask whether the premium can change at renewal or with age under the policy’s terms.

For whole life, cash values and dividends are not guaranteed. Ask the agent to show guaranteed values and non-guaranteed values separately. Ask about renewability, cancellability, any age-based premium change, and the limitations and exclusions in the specific policy form.

Review Underwriting, Exclusions, and the Insurer

Expect health questions. A fully underwritten key person policy requires health questions, and issue may depend on insurability. Answer them accurately, because the insurer relies on those answers.

Read the exclusions and limitations before you rely on the policy. Florida law requires life policies to be incontestable after they have been in force during the insured’s lifetime for 2 years from issue, except for nonpayment of premiums and, at the insurer’s option, provisions on disability benefits and additional coverage specifically against accidental death (Fla. Stat. § 627.455). But incontestability does not stop an insurer from relying on provisions that exclude or restrict coverage (Fla. Stat. § 627.463).

Name the insurer that issues the policy. Ask who published any financial strength rating, what it measures, and its limits. A rating is one opinion about an insurer. It is not a promise about a specific claim.

Use the time after delivery to compare the policy you received with the proposal you reviewed. Look for any difference in benefits, premiums, or exclusions.

Connect the Policy to Buy-Sell Planning, Cash Flow, and Compensation

Key person coverage and a buy-sell agreement solve different problems. A key person policy pays the business after a key person’s death. A buy-sell agreement sets the terms for an owner’s exit. Confirm the two documents work together before you sign either one.

Treat the premium as a recurring cash-flow item in your annual budget. Florida law requires a grace period of at least 30 days to pay a premium after the first (Fla. Stat. § 627.453). The insurer may, at its option, charge interest of not more than 8 percent per year for days used in that period, so do not rely on it as a budget plan.

Ask how the agent is paid. Insurance is offered by the licensed agent, separately from the accounting practice. Florida requires an agent to be licensed and appointed (Fla. Stat. § 626.112). Under Fla. Stat. § 473.3205, a CPA firm that accepts a commission for the sale of a product or service to a client must disclose that fact to the client in writing.

If you already own a life policy, compare any replacement carefully. A replacement must be documented and must not mislead you about the old policy or the new one.

Take the Next Step: Schedule a Coverage Review

If a key employee’s departure would be hard for your business to absorb, a coverage review is a sensible next step. You may be weighing a policy while payroll, lender commitments, or client relationships depend on that person.

Nischay Rawal, a licensed insurance agent, can walk through each point above using your own business numbers. We will also look at tax and cash-flow effects alongside the policy terms. Insurance is offered separately from the accounting practice.

For more detail, read our key person insurance guide. When you are ready, reach out through our contact page to request a coverage review.

Common Questions

The business decides how to use it.