Key Person Insurance Was Declined? Here Is What to Do Next

If your key person insurance was declined or offered at a higher rating because of medical history, here is what to do. Start by getting the reason in writing. Then check the application for accuracy, review the medical facts, and keep any existing coverage in force while you decide. This guide walks Florida business owners, including those in Miami and Fort Lauderdale, through each step.

What a Declined or Rated Key Person Application Means

A declined application means the insurer will not issue the policy on the terms you applied for. A rated application means the insurer will offer coverage, but at a higher premium or in a different risk class.

Key person insurance is owned and paid for by the business, which is also the beneficiary. The policy insures a person whose death or disability would cost the company money. The Insurance Information Institute explains that this coverage compensates a business for financial losses caused by a key employee’s death or disability.

A decline or a rating is the insurer’s own underwriting decision. It is not a judgment about the value of your business or the worth of the key person. Many owners hear the word “rated” and assume the door is closed. The written terms show what is actually offered. For how these policies are structured, read our key person insurance guide.

Why Medical History Affects Underwriting for Business-Owned Coverage

Underwriters use health answers and medical history to decide whether to issue a policy and at what rating. They review what the application says, then weigh it against the whole file.

The application asks health questions about the person to be insured. It often includes an authorization that lets the insurer request medical records from doctors and other providers. Insurers may also check industry databases. Through that authorization, the insurer can request what the records show.

Whether a decline or a rating follows depends on the facts of each file. That includes the conditions, the treatment dates and the records involved. Don’t plan around the idea that the insurer will overlook a medical history. A policy that is fully underwritten is decided on health information.

Florida also requires written consent before a business buys this coverage. Under Fla. Stat. § 627.404, a business may insure a key person only if written consent is obtained before the insurance is purchased. The business also may not retaliate against a key person who refuses to consent.

Step One: Get the Reason in Writing

Ask the insurer or the licensed agent for the specific reason behind the decline or rating, in writing. A written reason tells you what to fix and what needs a different plan.

Different reasons lead to different responses. A missing record calls for a records request. A data error on the application calls for a correction. A medical condition in the file may mean the offer takes a different shape, such as a rating or a different structure. Vague answers don’t help. Ask the agent to name the reason, the rating class and any condition the underwriter cited.

When key person insurance declined medical history, what to do first is the same every time. Get the reason in writing, then match each item to one specific action. Keep a copy of the decision, the application and every letter or email in one file. You’ll need that file for the steps that follow.

Step Two: Check the Application for Accuracy and Completeness

Check every health answer against the actual medical history before anything else goes to the insurer. Missing or inaccurate information can delay, rate or decline an application.

Leaving out a relevant condition, medication or treatment causes problems. It can create issues for the policy and for later claims. Florida’s incontestability rule, Fla. Stat. § 627.455, says a life policy must be incontestable after it has been in force during the insured’s lifetime for two years from its date of issue.

Even after that period, the clause doesn’t block every defense. Under Fla. Stat. § 627.463, an incontestability clause does not stop an insurer from raising defenses based on provisions that exclude or restrict coverage.

Review each health answer with the agent before any new submission. Correcting an error makes the file accurate. By itself, it does not change the underwriting decision.

Step Three: Review Your Medical Records and Insurance History

Gather your own medical records and compare them with the application. Ask each treating provider for copies. Then check the diagnoses, dates, treatments and medications against your answers.

Insurers also use industry databases that share certain information between applications. The MIB Life Index is one example. Ask the insurer whether it checked any such database in your file, and which items it relied on. That gives you a second list to compare with your own records.

These records serve one purpose: accuracy. They help confirm what the underwriter may have seen and whether anything needs clarifying with the insurer. They are not a promise about the next decision. Share the results with the agent before you resubmit anything, so the new application matches the records.

Step Four: Ask About Rated Offers and Keep Existing Coverage in Force

Ask whether a rated offer, a different face amount or a different policy structure is available. Keep existing coverage in place until the new decision is final. The current policy protects the business while the question stays open.

Replacing or surrendering an existing policy needs care. Florida’s unfair trade practices statute says churning by an insurer or an agent is an unfair method of competition and an unfair or deceptive act.

Fla. Stat. § 627.4553 requires written information first when an agent recommends surrender of a policy with cash value and the proceeds are not used to fund another annuity or life policy. That information includes estimated surrender charges, possible tax consequences and any forfeited death benefit, under Fla. Stat. § 627.4553.

Borrowing against a whole life policy to fund a new application deserves review first. Under Fla. Stat. § 627.458, a policy loan is available after the policy has a cash surrender value and while no premium is in default, but the insurer may defer granting a loan, other than for premium payment, for 6 months after application. Fla. Stat. § 627.458 reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” That section does not apply to term policies. For a plain look at term and permanent coverage, the NAIC Life Insurance Buyer’s Guide explains the difference between the two.

Planning the Business Side While Coverage Is Pending

A pending key person decision doesn’t pause the rest of your business planning. Buy-sell agreements, succession plans and cash flow still need attention while coverage is unresolved. Each of those decisions can move on its own timeline.

Federal tax rules add a point to check. Under 26 U.S.C. § 264, premiums are generally not deductible when the taxpayer is directly or indirectly a beneficiary under the policy or contract. A business that is its own beneficiary should plan with that in mind, and not assume a deduction.

Tax and cash flow questions belong to the accounting practice. Insurance itself is offered by the licensed agent, separately from the accounting practice. For Florida context on these decisions, see our Florida key person guide.

Talk Through Your Situation at a Coverage Review

A coverage review is the first meeting with us. We walk through the decline or rating reason, the application, the records and the options available for the key person.

Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice. The firm discloses in writing how the agent is paid before any engagement. Fees for the coverage review are explained to you before we meet.

For local context, see our Miami key person guide.

If your key person’s health history has left your business with a declined or higher-rated application, book a coverage review and we will walk through the reason, the paperwork and your options with you.