Know Who Receives the Proceeds Before You Need Them

In the most common key person arrangement, the business receives the money. The company owns the policy, pays the premiums and is named as beneficiary. That means the payout goes to the company, which can use it to cope with losing a key person’s work, relationships or know-how.

Key person insurance is life insurance a business buys on an owner or employee it depends on. The Insurance Information Institute describes it as coverage that compensates a business for financial losses caused by a key employee’s death or disability. This guide explains who receives key person insurance proceeds, and when a family or estate could be involved.

The Short Answer: The Business Usually Receives the Proceeds

In a standard key person policy, the business is the owner, the premium payer and the beneficiary. The business applies for the policy and pays the premiums. If the insured dies while covered, the business receives the death benefit.

Because the company is the one paid, the money is a company asset. It is not a personal inheritance for the key person’s family. Many people assume the family gets the money. Under the usual structure, they do not.

Whether that structure fits your company depends on the facts. The next sections explain the three roles that decide the answer. For the full overview, read our key person insurance guide.

The Three Roles: Owner, Insured and Beneficiary

Three roles decide where a policy’s money goes. The owner controls the contract and pays the premiums. The insured is the person whose life is covered. The beneficiary is the person or entity the insurer pays when the insured dies.

One party can hold more than one role. A business can be both owner and beneficiary while a key employee is the insured. Confusion starts when the roles are mixed without a plan. If an individual owns the policy and names a spouse as beneficiary, the spouse receives the money, not the company.

The beneficiary named on the policy is who the insurer pays. Family members may expect the money, but the designation is what the insurer follows. Keep the ownership and beneficiary settings matched to the company’s written decisions.

Why the Business Owns the Policy and Pays the Premiums

The business owns the policy because it has a financial stake in the key person’s continued work. Florida law lets a business entity have an insurable interest in the life, body, and health of its owners, directors, officers, partners, and managers, or those of any affiliate or subsidiary, and of key employees or key persons. Key employees or key persons are those whose position or compensation is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code. The rule applies if consent is obtained in writing from the key employees or persons before the insurance is purchased. The business must get written consent from that person before buying the coverage. The statute also bars retaliation against a person who refuses consent, per Fla. Stat. § 627.404.

Premiums are a cash flow decision. Plan for them as an ongoing cost paid from company funds each year. The tax result matters too. Federal law does not allow a deduction for life insurance premiums when the taxpayer is directly or indirectly a beneficiary, per 26 U.S.C. § 264. When the business is the beneficiary, that rule applies, so build the budget with it in mind.

The insurer decides whether to issue coverage, and on what terms, after underwriting. Underwriting can include health questions. Plan for that step before setting a timeline. A CPA should review the tax questions on premiums and proceeds, since they depend on the business and the policy.

How the Business Can Use the Proceeds

The policy does not require the money to go to the family. Common uses include:

• Replacing lost revenue while the business adjusts
• Recruiting and training a successor
• Paying debts or obligations the business carries
• Steadying cash flow during a transition

Put the intended use in writing. A short resolution in the company’s records helps partners, lenders and advisors see why the coverage exists. Agreeing on the purpose before a loss is easier than agreeing during one.

When the Estate or Family Could Receive the Money

The estate or family can receive the money when the policy pays the insured or the insured’s estate. Florida law says that proceeds payable to the insured, the estate or the executors become part of the insured’s estate. They are then handled by the personal representative under probate law, per Fla. Stat. § 222.13.

Under Florida law, when life insurance is payable to the insured, the insured’s estate or executors, the proceeds become part of the insured’s estate for all purposes and are administered by the personal representative under probate law, per Fla. Stat. § 222.13. Proceeds paid to other beneficiaries are included when the decedent held incidents of ownership at death, per 26 U.S.C. § 2042. That is why a policy an owner holds personally can pull the proceeds into the estate.

Beneficiary forms need regular review. An outdated form can send money to someone the owner no longer intends to benefit. Changes in ownership can carry tax and insurable-interest consequences. Review them before making them.

Key Person Insurance and Buy-Sell Insurance: Where the Money Goes

Key person insurance pays the business for its own losses. Buy-sell insurance funds an agreement that sets how an owner’s share is bought after a death.

Buy-sell proceeds can go to the surviving owners or to the deceased owner’s estate. The answer depends on how the agreement is written. Florida recognizes shareholder agreements that follow its statute. Under Fla. Stat. § 607.0732, such an agreement must either be set forth or referenced in the articles of incorporation or bylaws and approved by all persons who are shareholders at the time, or be set forth in a written agreement signed by all persons who are shareholders at the time and made known to the corporation.

A business can have both policies. Each should name its beneficiary based on its own purpose. For a side-by-side comparison, see our key person insurance vs. buy-sell insurance guide.

Common Questions About Who Gets the Money

Usually the business pays the premiums and receives the proceeds. The answers below cover the questions owners ask most often.

Reviewing Who Receives the Payout Before a Loss Occurs

Checking the payout path before a loss is far easier than sorting it out afterward. Start with three questions. Who owns the policy? Who is insured? Who is named as beneficiary? Then compare those answers with the business’s written purpose for the coverage.

Consider an owner who recently added a partner or revised a buy-sell agreement. That owner may not know whether the beneficiary still matches the new arrangement. The gap is easy to miss until a claim is filed.

Families who own businesses across borders, including many Indian-American owners, often have more people involved in these choices. Each added party is another question to check.

Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the accounting practice of NR CPAs & Business Advisors. Our team can arrange a coverage review of your ownership and beneficiary settings. Contact us through our contact page.