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.