Posts filed under 'key man insurance'
That’s an easy one. If you can think of a person in the company, whether that is you, your partner, a long time key employee or board members that make the whole thing work, whose death would cause a financial stumbling block, there is a need for business life insurance.
In addition, if your company runs any significant amount of ongoing debt, business life insurance on the principals of the company is a must. Business life insurance is there for many of the same purposes we all carry personal life insurance, the difference being that if not handled properly it’s not just your family that can be affected, but the family of your partner(s) and possibly the very viability of the company and the people it employs.
Just a brief overview of a few policies that business owners should consider. Buy/sell agreements are a real must when it comes to businesses where two or more people own the business. Funded by life insurance on each of the owners, it allows the company, upon the death of an owner. to buy out a family’s interest in the business. In most states if an agreement is not in place, the surviving owner either has to come up with the money to buy the family out or, if the family wishes, they can replace the deceased partner with someone of their choosing. From a practical standpoint the surviving partner really doesn’t want to be in a position of having to accept a new partner whether they want to or not. Their options are left open through a fully funded buy/sell agreement.
Key person insurance is often overlooked, but is vital to company continuity upon the death of a key person. That person could be a plant manager, a business manager or an office manager. It is that these people have become so key to the everyday running of the company that creates the need for a key person life insurance policy. With this type of policy, the company becomes the beneficiary and can use the money to overcome the obstacles that pop up due to their loss. It could be that these are the people who kept the customer base loyal. It could be that this was the person that helped the employee base be so productive.
An influx of cash upon the death of a key person in your company can provide incentive money to hire the right replacement person in a quicker time frame. It might provide smaller per employee bonuses to keep the team together and working hard during the transition. There really are no restrictions on the creative use of the money. A business owner might even use the money to fund a retreat for key customers to get their input and the qualities a replacement needs to bring to the table.
If the death of a partner will have an impact on the productivity of the company, the owners should consider carrying life insurance to pay off any debt the company has. The extra slack created by having the debt paid off could be just what it takes to ensure the company isn’t strapped during the adjustment period.
Bottom line. The death of an owner or key employee in a company can wreak havoc with the very ability of the company to survive. A well considered business life insurance policy can ensure a company will have the cash flow to deal with any number of challenges.
May 18th, 2009
It’s been a fascinating couple of years. I will sum it up by saying that we have helped a lot of people get life insurance who never thought they could. And what better way to celebrate the information we’ve shared and the victories we’ve had than with a shared meal, a key word salad.
Diabetes has been at the forefront of our life insurance efforts from the very start. We’ve made huge headway in finding aggressive underwriting for type 1 diabetes and type 2 diabetes. I think our strong point has been in education. There are a lot more people out there today that know what their A1c is than when we started.
I’ve been very clear about where some of the problems lie in our industry. The AARP/New York Life collaboration, on what can only be described as a sick crime against older folks, continue to offer the worst term insurance and whole life insurance in the business. They are simply not the advocate they claim to be.
I’ve stepped on some toes along the way. Selectquote and Zander Life insurance have taken exception to some of my observations. Being a Dave Ramsey fan and I think, ultimately, a reasonable person, I did apologize to Zander. In spite of Selectquote’s berating commentary, I still stand by my assertion that they are biased in what companies they offer (otherwise they wouldn’t be so easy to beat) and I still believe that Suze Orman should go back to waitressing. As to their assertion that I only use Selectquote and Suze Orman for search engine optimization, well, I don’t, even though they think I do. If I didn’t think there was better service elsewhere and more honest advertising, I would never have mentioned Selectquote.
We’ve touched on scuba diving and Prudential being a leader in great rates for recreational divers. Pru also stomps the competition on prostate cancer, sleep apnea and mild anxiety issues. While providing direction on those issues we have also been able to provide direction for those involved in skydiving and foreign travel to places where kidnap and ransom insurance is more than just a casual thought.
We’ve stayed abreast of the economic meltdown and recession that have whacked us all and tried to help people understand how best to handle their life insurance needs in these tight times.
We’ve held lengthy discussions about obesity and the impact it can have on other health issues such as hypertension or high blood pressure, cholesterol, heart disease, heart attack, stroke and cancer. We’ve discussed the risk and benefits of gastric bypass surgery as a means to avoid the life threatening side effects of being over weight.
Probably our biggest response has been from those suffering from depression and bipolar disorder. We reached a group of people that have truly been black balled in the insurance industry and we’ve been able to find some level headed underwriting and hit some major home runs for those who have the name tag but lead normal lives.
We have bared the facts behind the black eye of all black eyes in the insurance industry, the non guaranteed whole life, universal life and variable universal life policies and explained the alternatives in the permanent insurance market. There is nothing that provides greater value and peace of mind than a rock solid guarantee.
We’ve had frank discussions about business life insurance such as key man insurance and buy/sell life insurance. We did a whole series on women and life insurance. We’ve provided direction and information to private pilots that they aren’t getting anywhere else. We’ve talked about the guts of the policy when it comes to the two year suicide and incontestability clause and the accelerated death benefit and the beneficiary rights and the beneficiary issues for those who aren’t in a legal relationship such as a gay couple or an unmarried couple.
Bottom line. And the list goes on and on. We’ve tried to leave no stone unturned and no question unanswered in our quest to find life insurance for those whose mortality risk might be more challenging than average. As an independent agent it has been gratifying to have so many ways to help those who have been mishandled by the wrong agent or the wrong company. As we continue to reach out my prayer is that all who need help find it, and that more agents consider serving those who are harder to help.
March 18th, 2009
In our current economic meltdown there are a lot of people out there trying to say that the government or big business are trying to run our country. What this country really runs on is small businesses and what really makes those businesses work is the owners or the managers.
This is a country made of small businesses and generally speaking, all of those that have employees, have managers. As long as I’m being general, I think it’s safe to say that a good manager is a very valuable asset. I believe, generally speaking, that most business owners would agree that insuring the valuable assets of their business is a prudent idea. And logically, the loss of a valuable asset can cause a substantial financial loss to the if the appropriate business life insurance isn’t in place.
This is exactly why small business owners insure themselves and exactly why key man insurance was created for managers or other individuals that companies are dependent upon. The way key man insurance works is that a value is determined that represents the loss to a business if the key person should die. It can be done several ways, but for the sake of this example we will say that the life insurance policy, a return of premium term insurance, is two times the annual salary of the manager. We pay our manager $125,000, so we insure his life for $250,000.
We have determined, in this case, that it would take about a year to hire, train and bring up to speed a new manager. Because our manager is so integral in the success of the business, we anticipate that there may be some turmoil caused by his untimely death. There might be customers lost, production slow downs, employees lost, etc. We might also need to anticipate paying a hiring bonus so we can hire as high up the food chain as possible to minimize the turmoil. Anyway, suffice it to say, key man insurance is definitely justified.
Now to why I decided to buy a return of premium term policy to fund our key man policy. Let’s say that our manager has 15 year to go to retirement when we purchase the policy and, being the good employee that he is, he doesn’t die but keeps on doing a stellar job right up to his retirement day.
During those 15 years we have insured a valuable asset of the business to protect the business. And yes, you got to write that off.Our manager has made us tons of money and saved us hundreds of tons of headaches, because that’s what good managers do. So now it’s time to give him a bonus.
Our return of premium term policy has cost the company $4000 a year for the last 15 years and now, because our manager is still alive and we bought the right kind of life insurance policy, the company gets back all of the premium paid in. Well, that just freed up $60,000 that we can hand to our retiring manager at his going away party. A bonus for a job well done.
Bottom line. Things happen that we never expected as business owners. The scenario above is a win/win either way.
March 6th, 2009
Every once in a while I talk with a client who explains to me what they need from their life insurance policy and what the last agent they dealt with sold them and it leaves me wondering if the agent heard anything the client said. Or, perhaps, the last agent just sold them the most profitable (for the agent) thing in their portfolio?
Case in point. The insured is a developer who took out a policy at age 50 to cover the ongoing debt of his development corporation, about $500,000. When we talked he told me he had $500,000 in force and that was all he needed because the corporate debt never exceeded that amount. He had in fact consulted a “friend” insurance agent some years before specifically to lower the amount of insurance from $1,000,000 to $500,000.
The insured is wealthy and really doesn’t need the insurance, but “just didn’t want his wife to hassle with the corporate debt if something happened to him”. She is an officer of the corporation and would succeed him as CEO and really would not lose any income. All he wanted was life insurance.
The “friend”, who is also a Northwestern Mutual agent sold the insured a $500,000 whole life policy that is costing a little over $12,000 annually. That is his guaranteed level premium to age 100. He is currently 64. The policy has performed very well, accruing $210,000 in cash value and purchasing an additional $125,000 of insurance with dividends. He now has a $625,000 policy (remember he thought he still had $500,000?) with $210,000 of cash value. My question is why? What part of this scenario did his “friend” misunderstand?
The client wanted $500,000 worth of life insurance. He didn’t need and still doesn’t need anymore than that. He took the policy out at age 50 and could have purchased a 30 year term for around $2,000 a year. Remember, this is a key man insurance policy covering him as CEO. Will he still need that coverage at age 80? Knowing his drive and health it’s possible, so he could have purchased a universal life with a no lapse guarantee for around $4,400 per year that would have had level premiums to 100 and guaranteed coverage with no further premiums for life.
So, when I asked him if I could offer a proposal on his life insurance he said sure, but since he had it with a “friend”, it needed to save substantial money for him to consider. I ran a proposal that uses his current cash value of $210,000, doing a 1035 exchange into a single premium universal life with a guaranteed death benefit to age 120 with no more premiums ever. The face amount is $676,000. We can whittle down the size of the 1035 and buy a paid up $500,000 policy if he wants and he can take the extra cash value and go fishing. Substantial savings? His annual bill goes from $12,000 to $0.
So, why did his friend sell him a policy he didn’t need? Because the insured was wealthy and the friend wanted an ongoing annual income from him? The friend did what was best for him and not for the insured? The friend didn’t have his hearing aid in?
Bottom line. Ask your agent why their plan is best for your long term goals. Ask your agent if there are other ways to consider providing the same coverage. Ask your agent to give you three options to consider and ask your agent how much money they make the first year from each option and how much they make each year you renew. Then get a second opinion from an independent agent.
August 4th, 2008
There is a common misconception that has floated around for the past 100 years or so of my life that if a person has cardiac problems, a heart attack, or coronary artery disease (CAD) requiring heart bypass surgery or an angioplasty, they are irreparably damaged in their ability to get life insurance, especially affordable life insurance.
This isn’t a simple thumbs up or down issue, but generally speaking in the absence of severe damage caused by a heart attack or chronic CAD requiring multiple procedures, insurability is not an issue. It will absolutely be at higher rates than someone who hasn’t had any cardiac issues, but affordable in most cases.
Some of the things that underwriters look for in heart attack cases would be:
1. Age of occurrence (better after age 50 than before)
2. Risk factors (obesity, high cholesterol levels, family history, high blood pressure, etc)
3. The amount of damage (usually measured on a stress test by the left ventricular ejection fraction (LVEF). Over 50% is insurable. Under 50% generally not, but would be weighed against offsetting factors.
In the case of CAD in the absence of a heart attack underwriters look at:
1. Age of onset (again, better after 50, not so good before 50, very challenging before 40)
2. Number of vessels effected (blocked). A single vessel blockage is better than what would be considered a more aggressive or pervasive multiple vessel blockage.
3. Again, risk factors. What underwriters are looking for here is whether your risk factors will tend to push you toward chronic CAD. If you have a good build and get plenty of exercise and do what it takes to control cholesterol and blood pressure, that’s a good thing. If you are overweight, don’t exercise and don’t get your cholesterol and blood pressure under control, the risk you pose to an insurance underwriter is much greater.
4. Underwriters will want to see a stress test usually at least 6 months to a year post procedure to determine the extent of any damage and how well the repair job went.
In spite of the myth, heart issues are insurable and usually at affordable rates. If you are applying for insurance, be prepared to answer the questions posed above. Know your cholesterol. Know your blood pressure. Know what meds you are taking. Know the date of your last stress test and get a copy of it. It is much easier for an independent agent to successfully shop for you armed with facts than being armed with generalities (the doctor says I’m doing fine). It would be a rare person who would know and a rare doctor who would discuss your LVEF. Underwriters have to know it in order to assess your application correctly.
Bottom line. If you’ve had a cardiac event, don’t throw in the life insurance towel. First and foremost, don’t go to your local State Farm or Farmers agent with your desire for life insurance unless you have a fondness for rejection. An independent agent will have access to companies that understand the underwriting of heart issues and provide your best possibility of success.
June 6th, 2008
Return of premium term life insurance is certainly a hot topic these days, so where do you turn to get an unbiased analysis of whether or not it is a good fit for your financial needs? I guess my best advice is simply to steer clear of anyone that thinks it’s the right answer for everything.
After years of analyzing ROP, it is very clearly not a one size fits all type of product. The premise is attractive. You buy term insurance and if you don’t die you get all the money you paid in back. Here is a Forbe’s magazine take on the idea.
forbes-return-of-premium
Forbes is clear about how the whole deal works. The insurance companies simply overcharge for the insurance allowing them enough extra interest earning excess that, even after paying back all the premiums at the end of 20 or 30 years, they make a handsome profit. The real frosting on this cake for the insurance companies is not that they got to use excess premiums for 30 years, but if they’re paying back the premiums that means they got out of paying “the big one”, the death benefit.
I don’t mean to infer that the insurance companies are getting their cake and eating it too. I believe there are certain instances where return of premium can be appropriate, if not purely the prudent choice.
The first place where I think this idea has some real merit is with younger adults. For instance if you take a young married couple around 30. Some would say buy whole life because term insurance won’t last long enough and whole life is permanent. Those are whole life agents and what they want is large premium, large commission and large renewals. But consider this.
People at 30 barely have a grasp of life insurance and certainly don’t have a handle on whether their life insurance needs are temporary or permanent in nature. They generally do have two things way in their favor, they’re young and healthy. I believe a 30 year ROP policy is a prudent move. Numero uno, it gets them insured. Second, the rate is locked in level for 30 years, into the years when they will in fact have a handle on what their real insurance needs are. Third, the policy is convertible so their youthful health rating is locked in for the full term and they can always convert all or part of the policy to permanent coverage. Lastly, at the end of the 30 years they have the option of taking a full tax free cash refund or rolling the returned premium into a permanent converted policy to drive the cost of the new policy down.
That’s what I recommend if you’re young. You can get a lot more coverage for a lot less money than whole life and the ROP policy has more flexibility and options.
Another perfect fit is key person business coverage. Often a company will carry a policy on a key person simply because they have economic value to the company. Their death would cause a financial setback that the policy can offset. A key person generally happens to be someone that a company depends on for a long time and would like to reward for their service upon retirement. So, the company can protect themselves and, if the key person lives to retirement, they can use the returned premium as a retirement bonus.
Outside of those two areas I think the product should be carefully weighed against your own ability to invest the difference between the premiums for straight term and ROP. Also, budget should be carefully considered. Does the increased premium stretch your budget or cause you to purchase less insurance than you need?
Bottom line. Return of premium is a product worth a look, but it isn’t right for everyone. A good independent agent should be able to crunch the numbers for you on all of the available options and help you make the right choice.
May 22nd, 2008
I swear, where a year ago I was thinking New York would probably miss this century also, they have now rocked the life insurance world by approving return of premium term insurance for sale.
Return of premium has been available in the rest of the country for years, but today ING Reliastar the first ever ROP products in New York. Until this release New Yorkers were left only to wonder what it would be like to use term insurance for protection, and having outlived it, get a full refund.
Forbes ran article almost three years ago extolling the virtues of ROP (every where but New York and Utah). Attached is that article.
forbes-return-of-premium.pdf
While there isn’t any doubt that the younger you are the more attractive the product becomes, it can still fill needs that no other products can. For instance, a key man business insurance policy. You can use a return of premium policy as an insurance/bonus program. If the key employee dies, the money is there to help the company through a transition phase. If the key employee lives, the company can bonus the tax free premium refund as a retirement gift.
Bottom line. Let’s all welcome New York to the rest of the country. Past due, but welcome. Question now is, will Utah ever jump on board. Don’t hold your breath.
February 21st, 2008
Small businesses, the backbone of American employment, often run by the slimmest of margins. I’m not talking about profit margins. I’m referring to the owner or one of the owners being just a heart attack away from leaving their family with the business or a partner trying to figure out how to buy the deceased partner’s family out of the business.
In either case, business insurance in the form of key man or buy/sell life insurance can save the company and your family the strain of trying to figure out what to do with their inherited new career.
There are so many unprotected partnerships out there that it boggles the mind. How would you like to have your partner replaced by one of his family members tomorrow? If you can’t afford to buy out the partner’s portion of the business, the family has a right to do what they need to do to replace the lost income. You could end up with someone “helping” you run the business that doesn’t have the slightest clue what to do.
If you are a sole proprietor, carrying life insurance to replace the lost income and carry the business until it is closed down, sold or turned over is critical. In the absence of that protection, your family will not only lose the income, but likely lose the business along with it. Rare is the small business that can be successfully taken over by your wife or another family member.
Bottom line. Ensuring the succession of your business with life insurance makes great sense and in most cases the cost is very low. Compared to the alternative it is always low.
February 14th, 2008
My mother never told me running a small business was easy. In fact it went something more like, “wouldn’t you be better off getting a real job?”
Whether you are in business for yourself, or work for someone, your future can be in jeopardy if you, or they, have not adequately protected the business with business life insurance. The untimely death of an owner, partner, or key person in a business when there is no business life insurance such as a buy/sell insurance policy or key man insurance in place can be the beginning of quick end.
We often think of life insurance just in terms of protecting our family from the loss of income if a parent should die, or in terms of final expense or burial life insurance. The unexpected death of a business owner or key person can have a dramatic impact, not only on their family, but on the employees of the business and their families.
If you own a business and don’t currently have business life insurance, meet with an independent life insurance agent soon and review the structure and financials of your business. The agent can then make recommendations and provide insurance quotes that help your business become a legacy to your family and your partner(s) and employees, rather than a loss to them all.
In most cases you will want to look at term insurance or possibly return of premium term insurance rather than universal life or whole life. Why term insurance? The truth is that most businesses change too rapidly to make locking in even the longer terms or permanent insurance. A more prudent approach is to look at each aspect of your business and consider the proper term length. It may take more than one life insurance policy, but with term insurance being as affordable as it is, you should certainly be able to protect your business without significant impact on your budget.
So, mind your own business! A good steward of a business will ensure that the business will survive them.
February 25th, 2007
This is a country made of small businesses and generally speaking, all of those that have employees have managers. As long as I am sailing with generalities, I think it’s safe to say that a good manager is a very valuable asset. Which leads me to another generality. I believe that most business owners would agree that insuring the valuable assets of their business is a prudent idea. And lastly, the loss of a valuable asset can cause a substantial financial loss to the business if it isn’t insured.
I’m not sure an attorney of generalities could have built a better case for a type of business life insurance called key man insurance. The way key man insurance works is that a value is determined that represents the loss to a business if the key person should die. It can be done several ways, but for the sake of this example we will say that the life insurance policy, in this case, a return of premium term insurance policy, is two times the annual premium of the manager. We pay our manager $125,000, so we insure his life for $250,000.
We have determined, in this case, that it would take about two years to hire, train and bring up to speed a new manager. Because our manager is so integral in the success of the business, we anticipate that there would be some turmoil caused by his untimely death. There might be customers lost, production slow downs, employees lost, etc. We might also need to anticipate paying a hiring bonus so we can hire as high up the food chain as possible to minimize the turmoil. Anyway, suffice it to say we can certainly justify the key man policy.
Now to why I decided to buy a return of premium term policy to fund our key man policy. Let’s say that our manager has 15 year to go to retirement when we purchase the policy and, being the good employee that he is, he doesn’t die but keeps on doing a stellar job right up to his retirement day.
During those 15 years we have insured a valuable asset of the business to protect the business. Our manager has made us tons of money and save us hundreds of tons of headaches, because that’s what good managers do. So now it’s time to give him a bonus.
Our return of premium term policy has cost the company $4000 a year for the last 15 years and now, because our manager is still alive and we bought the right kind of life insurance policy, the company gets back all of the premium paid in. Well, that just freed up $60,000 that we can hand to our retiring manager at his going away party. A bonus for a job well done.
If that doesn’t get you all choked up, you could be a manager whose employer bought the wrong kind of term life insurance.
February 16th, 2007
