Question 1

How does key man life insurance protect Florida businesses during ownership transitions?

Accepted Answer

During ownership transitions: the death of a business owner triggers the buy-sell agreement. The key man life insurance provides the funds for the surviving owners (or the business entity) to purchase the deceased owner’s interest from the estate. Without insurance, the surviving owners would need to: borrow funds (at potentially unfavorable terms during a period of instability), liquidate business assets (which may reduce the business’s value), or admit the deceased’s heirs as owners (which may not be desired). The insurance proceeds provide immediate liquidity, allowing a smooth transition without financial strain on the business.

Question 2

What are the different ownership structures for key man life insurance in Florida?

Accepted Answer

Three common structures: cross-purchase (each owner purchases a policy on the other owners; upon death, the surviving owner uses the proceeds to buy the deceased’s interest directly from the estate), entity purchase (the business entity owns the policies on all owners; upon death, the entity uses the proceeds to redeem the deceased’s interest), and hybrid (a combination where some interests are cross-purchased and others are entity-redeemed). Cross-purchase produces a step-up in basis for the surviving owner but becomes complex with multiple owners (n owners require n×(n-1) policies). Entity purchase is simpler but may not provide a basis step-up. The optimal structure depends on the number of owners, tax considerations, and the buy-sell agreement terms.

Question 3

What happens to key man insurance if the insured employee leaves the Florida business?

Accepted Answer

If the key person departs: the business can maintain the policy (continue paying premiums and remain the beneficiary; this may be appropriate if the business still has an insurable interest, such as ongoing contractual obligations or loans guaranteed by the departing person), transfer the policy to the departing employee (the transfer may trigger tax consequences under IRC Section 101(a)’s transfer-for-value rule), surrender the policy for its cash value (if it is a permanent policy with cash value), or let the policy lapse (stop paying premiums). The business should coordinate with the departing employee and tax counsel to determine the best course of action.

Key Man Life Insurance Business

Key Man Life Insurance for Florida Businesses

Transition Protection

Ownership Structures

Departing Employee

Related Terms

Barnes Walker Business Succession

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