Question 1

What is key employee insurance?

Accepted Answer

Key employee insurance (also called key person insurance or key man insurance) is a life insurance or disability insurance policy purchased by a business on the life or health of an essential employee. The business owns the policy, pays the premiums, and is the beneficiary. If the key employee dies or becomes disabled, the business receives the insurance proceeds to cover: the cost of recruiting and training a replacement, lost revenue during the transition period, the repayment of business debts that the key employee’s skills supported, and the stabilization of the business during a period of uncertainty. In Florida, key employee insurance is particularly important for closely held businesses, professional practices, and businesses with significant customer or client relationships tied to specific individuals.

Question 2

How is key employee insurance used in Florida real estate businesses?

Accepted Answer

In Florida real estate businesses: brokerage firms insure top-producing agents whose departure would significantly reduce the firm’s revenue. Development companies insure the principal developer whose relationships with lenders, contractors, and government officials are essential to ongoing projects. Property management companies insure the managing principal whose client relationships sustain the business. Title companies insure the owner or managing attorney whose expertise and licenses are required for operations. The coverage amount is typically based on a multiple of the key employee’s annual compensation or the estimated revenue loss over the replacement period (typically 2-5 years of earnings).

Question 3

What are the tax implications of key employee insurance in Florida?

Accepted Answer

Tax treatment: premiums paid by the business are generally not tax-deductible (IRC Section 264 prohibits deduction of premiums for life insurance where the business is the beneficiary). However, death benefits received by the business are generally income-tax-free (IRC Section 101(a)). For policies exceeding $50,000 in coverage on any one employee, the employer must comply with notice and consent requirements under IRC Section 101(j) (the "employer-owned life insurance" rules): the employee must be notified in writing that the employer intends to insure them, the employee must consent in writing before the policy is issued, and the employee must be notified that the employer may continue the coverage after the employee’s termination.

Key Employee Insurance

Key Employee Insurance in Florida

Purpose

Real Estate Applications

Tax Treatment

Related Terms

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