There are definitely two schools of thinking on the subject of how to handle executive life insurance, especially key person policies. Just to put this in perspective, I’m kind of an old guy and I would call the idea of using cash value policies to fund key person insurance is definitely old school. The thought process has some logic to it. The company carries life insurance on this person because frankly it would be a setback, in some cases a huge setback, if they were to die without the proper planning time that usually comes with retirement. The idea of cash value is that if this person, whether the CEO or the head of the manufacturing and shipping department, has really been a cornerstone of the business, cash value life insurance can cover that need for cash to ride out the setback, and when they make it to retirement, the cash value can make a nice retirement bonus.
As a business person I know that showing appreciation is key to keeping great employees. Letting them know there is two sides to the key person life insurance policy can be a great way of showing gratitude and, depending on how long the cash value policy is in force and how well it performs, can be a meaningful contribution to their retirement. But remember the times we’re living in. When this type of package was the most popular people had long careers….with the same company!! That isn’t as true today when having a career usually means you’ve stayed in the same line of work for a long time and, on average, have gone through at least 3 or 4 employers. Even CEO’s and Presidents of companies, what used to be hallowed ground, now come and go with better offers or a board of directors that has decided they really aren’t a valued commodity and are no longer key to the success of the company.
I think we have to admit that we are experiencing corporate life differently today and as such I would make a case for the consideration of business life insurance being funded with term insurance. It provides the protection the company needs against the death of a key person and leaves the door open for the company to be as creative as they want to be in making sure that the key person knows they are valued for more than just the death benefit. Term life insurance also has the advantage of keeping cost lower when that key person has impairments that may increase mortality costs of insurance, something that can be a bit overwhelming when cash value policies are considered. An accumulating cash pool doesn’t have to be part of a life insurance policy, and because of the revolving door career reality of today, might be better managed separately. And let’s be real about our businesses and the fact that managing our cash flow is much easier when less is going out (term life insurance) versus substantially more (cash value life insurance).
Bottom line. I believe in rewarding those who work hard for and stay focused on the success of the company, but not at the expense of the financial stability and prudent financial planning of the company. If you have questions or want to look at executive key person and bonus comparisons, call or email me directly. My name is Ed Hinerman. Let’s talk.