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.
This post is somewhat dated. Life insurance underwriting is changing and evolving continually. For more updated information check out some of the key word links. If you have a specific question or topic you need information for do a search. If you don’t find the answers you need contact me and we’ll make sure you get the information that is important to you.
Ed Thank You for taking time to write and inform us who need information in the Life insurance field. My ? is If a person is in great health but comes from a family of 12 and 2 siblings have died, 1from heart attack and another from cancer before age 60 is there any way to help them get a better than standard rate?
Second ? what do people who have been adopted do for underwriting questons of family members?
Dan,
Good questions. The sibling issue can be overcome two ways. If you are over age 60 there are companies that won’t hold that history against you. If not, there are a few companies that only underwrite family history of parents.
With either of those avenues you would get whatever rate class you qualify for on your own.
With respect to adoption, if you have no knowledge of your genetic family history then the question is simply answered “unknown/adopted”, and it is not held against you.
Let me know if you have any other questions.