If not handled properly, financial matters can create sticky situations both in our personal lives and our professional ones. Whether determining how to pay the bills or how a business is going to protect its interests, individuals and families have lots of important financial decisions to consider. If you have business owner clients, one of these financial decisions may be to purchase key person insurance on an employee who’s crucial to the success of the organization. Yet proving the need and being able to financially justify the amount of coverage desired is an important component of the underwriting process for any business case. As the agent, it’s critical for you to have the knowledge and know-how to step in and get the policy placed.
Key (man) person insurance is a policy designed to compensate the business for loss due to the death or incapacity of a key employee. The company is owner, premium payor and beneficiary of the contract. Because the policy does not indemnify the business for actual losses, the death benefit is determined by estimating any costs to the business attributable to the key person’s absence such as 1) hiring and training a replacement, 2) guaranteeing business loans, 3) lost sales and 4) lost opportunities for revenue from projects terminated from lack of the key person’s involvement. Although the key person’s role may seem straightforward to the business and even to you as the agent, the carrier may find it difficult to justify underwriting a large policy if the right information isn’t conveyed to support the case.
When a business decides to purchase key person insurance, think of it as a way to buy the physical and intellectual property of this individual. Does he or she have a copyright or patent that’s imperative for the business to succeed? Can you provide a pro forma of the individual’s past performance to help substantiate the value of the desired policy? Is the company already taking orders for a product this individual has the physical or creative rights to produce? Justifying the value of the insurance policy may hinge upon pointing out why the success of the firm will be impacted by these key factors and just how much they may mean to the business’ bottom line. If the individual is under a contractual obligation to remain with the company for a period of time, that may be valuable information to the underwriter, particularly if it’s equivalent to the life of the policy. Also, if the key person has a minimum salary agreement for the first few years of employment, identify in your cover letter how that may change as certain production levels are met and the company grows.
Designing a key person case appropriate for a specific business owner client can be a challenge, but the rewards can be tremendous. Keep in mind you will likely want to involve the company’s lawyer to ensure contracts and other documents are structured properly. Knowing how to use life insurance as a tool for achieving critical business objectives can help you stand out from your competition and position yourself positively in your community. If you’d like more information about key person insurance such as our business insurance fact-finder or have questions regarding case design, contact your Creative Life Sales Team. We have the keys to turning a variety of advanced life sales concepts into continued success for your business.
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12449 – 2012/8/22