What Is Key Person Life Insurance?
Key person life insurance (or business life ) is a life insurance policy taken out on the life of a business owner. In addition, key person life can be taken out on a valuable employee.
Perhaps a top salesman. Maybe a vital administrative assistant. Even your digital marketing person could be key to the business.
Keep in mind that key person life insurance is different than group life insurance which can provide modest coverage to all employees.
How Can Key Person Life Insurance Help A Business?
Purchasing key person life insurance helps to protect business owners from shouldering the financial burden of replacing a deceased employee. It can be expensive and difficult to compensate for that kind of loss to company operations.
Surviving owners may have to borrow the funds necessary to hire and train a replacement at expensive interest rates. This could damage the business or slow down the growth of the company.
It could mean liquidating business capital still needed by the business/ This would have negative effects. Sometimes, borrowing isn’t an option at all-especially when the stability of the company is in question.
Surviving owners could be forced to use their personal property such as home or cars as collateral for a private loan. Therefore, ultimately if none of those risky options work, the business could lose the confidence of outside investors, customers and employees.
Almost on a daily basis we are reading stories about a small business is struggling after the death of a key executive.
Key person life insurance is still vastly underused as a tool to protect businesses. We are starting to see more companies open up to the idea of placing this coverage on employees.
How Does Key Person Life Work?
It’s simple. The business purchases a policy on a key employee’s life, pays the premiums, and is the beneficiary of the policy. If the key employee dies while the policy is in force the company receives the death benefit proceeds.
These proceeds help cover the financial losses resulting from the employees death.
Here’s an example of how key person life coverage works:
ABC, Inc. is an established company listed as an S-Corporation. They provide IT services to small and medium size business. Joe founded the company 10 years ago. It has now grown from the original staff of three employees to over 40.
As the company has grown additional leadership has emerged to meet the demands of its customers. Sally has been the lead on a number of programs that play a big role in the company’s future success.
She has proven her ability to get new offices running smoothly. She’s also responsible for maintaining ABC’s employee training programs.
Aware of the value Sally adds to the company, Joe considers how the business would survive without her. Therefore, Joe consults with his insurance agent about protecting the business should something happen to her. He wants to purchase a key person life insurance policy on Sally’s life.
Part of Sally’s job entails launching new store locations. In the event of Sally’s death a delayed store launch could cost the company $200,000- $400,000. A key person coverage amount of $400,000 would eliminate this loss.
How To Choose Between Term and Whole Life Coverage? 
Both term and whole life insurance(also called “permanent” insurance) can offer protection for a small business.
Whether a term policy or whole life policy is best for your business depends on a number of factors.
This is particularly important if you need insurance temporarily or for an indefinite period.
Term insurance is often the solution for a young company. Lost-cost premiums and a limited term of coverage are usually best for the needs of the business owner.
Guaranteed level premium term has premiums that remain fixed for a period of 10 or 20 years, for example. The annual premium will not change during this period.
Whole life e can be used as your business grows. Or if you find that you’ll need life insurance for an indefinite period of time.
A whole life policy provides a lifetime of coverage at the same annual premium. It also builds cash value that can be used to fund needed capital or expansion.
The cash value can also provide the basis for a retirement plan. This is particularly important if the business can’t be sold for a large sum of money, which is often the case.
Choosing between term insurance and whole life insurance is not necessarily an either/or decision.
Sometimes business owners decide that a combination of term insurance and whole life best meet their needs.
Real Life story-
Early in my career I had the opportunity to see the real benefits of how key person insurance works. At the time I was still fairly young in the business.
Seeing the impact that life insurance can have on a business’s survival really hit home.
A local auto dealership owner was looking to provide $2.5 million of key person protection on his life. He knew that if something happened to him the dealership would need liquidity to keep the doors open.
His son was also in the business but fairly early in his career. The dad had the name and the relationships locally with the community. A policy was applied for an approved for coverage. The policy was a simple term policy and was issued at a relatively inexpensive premium.
The insured was healthy at the time so underwriting the contract went smoothly.
Not long after the policy was issued the insured was diagnosed with cancer. Unfortunately, the cancer was aggressive and approximately one year after the policy was issued he passed away.
I saw firsthand how a key person life insurance policy saved a business. The son of the owner basically said these very words when the check was delivered.
Another real life story-
Another example I encountered was an engineering firm with 3 partners. We insured all three partners with whole life policies. The policy cash value grew over the years.
Although term insurance is great for providing death protection, whole life insurance when appropriate can provide death protection and tax-deferred cash value growth.
In this case, the cash value growth came in very handy. In the downturn of 2008 the firm laid off several employees as work dried up. They were able to meet payroll and other ongoing expenses by using the cash value which was accessed via a policy loan.
Remember, it is hard to get a bank loan for cash when the economy is doing bad. The owners of the firm had at their instant disposal a considerable amount of cash value to use to keep the company afloat. No loan documents to fill out, no approval from the company. Just a simple phone call and a couple of signatures and the cash was on the way.
Again, I remember the owners telling me this cash value kept their doors open.
A few years later one of the partners passed away. The death benefit from his policy helped the other partners buy-out the deceased partners shares. This provided the deceased partners wife with cash instead of a business she had no intention of owning or running as a partner.
Term Life Insurance- exam or no exam?
When purchasing term life insurance for key person protection you have options. Oftentimes, depending on the situation you may not need to have an exam or lab work.
Nowadays, many life insurance companies will offer high amounts of coverage with no exam. Now, no exam does not mean guaranteed issue. They will still do a background check, MVR check and prescription check.
And, if they find any red flags they could still order an exam and lab work.
The advantages of the no exam is much quicker turnaround time for underwriting. The disadvantage for no exam is typically you will pay a bit more for the coverage.
But, it is important to note that based on your age and amount of coverage the no exam option may still be very competitive.
We recommend most people complete an exam. This will insure you get the lowest rates possible.
Different types of term life insurance policies
Which term life insurance policy should you choose? Below you will see several options to choose from. All have their advantages and disadvantages:
- Ten Year Guaranteed level term- rates stay level for 10 years.
- Fifteen Year Guaranteed level term- rates stay level for 15 years.
- Twenty Year Guaranteed level term- rates stay level for 20 years.
- Twenty-five Year Guaranteed level term- rates stay level for 25 years.
- Thirty Year Guaranteed level term- rates stay level for 30 years.
- Forty Year Guaranteed level term- rates stay level for 40 years.
- Return Of Premium Option term- all premiums are returned if you outlive the term.
Which plan you choose depends on how long you “think” you will need or want the protection to be in force. I tell most of my clients buy as much coverage as you need for as long as you think you will need it.
Nobody can predict what will happen. I do know this, no life insurance policy is any good if it isn’t any force when you die. A good agent can help you determine the amount of coverage and the plan of coverage needed.
What if I or my key employee has health problems?
Okay, this is where you really need an expert agent. Someone who has been in business for a while and knows the ins and outs of the special risk marketplace.
It’s important to remember that all life insurance carriers look at your health and lifestyle differently. What one company may see as an absolute declination another may see as a standard risk.
In order to find which company will underwriter you the best you must work with a specialist. A special risk agent is typically an independent agent with dozens of carriers to choose from.
I recommend someone who has been in the life insurance business a minimum of 10 years. This means they have had ample opportunity to learn the ins and outs of the special risk market and know how to negotiate.
Underwriting diabetes-
Diabetes is a very common medical issue that life insurance companies see. Their are a few specific life insurance carriers that specialize in offering the lowest rates for diabetics.
Here are a few important questions that will need to be answered in ordered to quote:
- Date of birth
- Age of diagnosis
- Current treatment
- Current A1C
- tobacco or non-tobacco
- height/weight
- any other ongoing medical concerns
This will give your agent enough information to probably find you a tentative offer for coverage. Again, it’s important to remember that you must use a special risk agent who knows the companies that underwrite diabetics.
Underwriting heart disease-
Heart disease is probably the most common medical condition we see as agents. There are many heart conditions that fall under heart disease. Here are a few of the most common.
- Heart attack
- Coronary by-pass
- atrial fibrillation
- angioplasty
- HCD
- left bundle branch block
As with diabetes, there are several questions that can help determine if or what your cost will be. These include:
If you have access to your cardiac reports including EKGs, catherizations studies, echocardiograms this will be the most important information needed by the underwriter.
Other common medical conditions-
Diabetes and heart disease are two of the most common conditions life insurance companies see. Other conditions that are commonly encountered include:
- High blood pressure/ cholesterol
- Post cancer
- MS
- crohn’s disease/ulcerative colitius
- Rheumotoid arthritis
- Overweight
- kidney disease
Although it is impossible to insure every condition, more progress is being made every year in the medical community. No longer are pre-existing conditions an automatic high rating or decline for key person life insurance.
High Risk Hobbies-
Another thing that underwriters see when reviewing key person life insurance is high risk hobbies.
These hobbies can include:
- Auto-racing
- Sky diving
- Scuba diving
- Mountain Climbing
These activities rates are determined by several factors such as how often, where, how much, how fast, etc.
We have had excellent success in find key person life insurance for those who participate in these activities.
Conclusion-
Searching for the best rates on key person life insurance doesn’t need to be difficult. No matter if its term life insurance or whole life insurance, a good independent broker can offer you multiple carriers to choose from and walk you thru the process.
Thank you for reading this blog.
If you would like to discuss for free your current situation, please reach out. You can reach the owner of the agency Mike Raines at 678-207-8160 or email mike@specialriskterm.com
