Small and midsized business owners are so busy waging the daily battle of business that they often don’t think long term enough. They don’t strategize for various eventualities like losing a key employee.
“Our job as a risk manager is to think about those types of strategies for you,” says Marc McTeague, executive vice president at SeibertKeck Insurance Agency. “I know what it’s like to own a business, and you’re just so busy running it that sometimes you don’t do proper planning. Or, you think, ‘Hey, it will never happen to us.’ But it does.”
Smart Business spoke with McTeague about the benefits of key life insurance.
What is key life insurance?
Key life or key man life is when a business owner takes out a life insurance policy on its key employees, with their permission. Then, if that crucial member of the team dies suddenly and the business suffers an economic loss from not having that institutional knowledge around, the key life bridges the gap. It allows you to find a new person, pay for his or her training, pay for any lost sales opportunities, etc.
The key employee could be a COO or controller who has control of all the banking relationships and finances, a superstar salesperson who is extremely well connected or a plant manager who has a significant role in your manufacturing processes and efficiency.
The great thing about key life insurance is that your agent can be creative with how the policy is written, whether it’s universal life, whole life, term life, blended products, etc. Also, you can do a split beneficiary with the person’s spouse or heirs. So, if you buy a $ 1 million policy — $500,000 goes to the company and $500,000 goes to another beneficiary.
As long as the business doesn’t write off the annual premiums it pays on the policy, then the death benefit is tax-free.
How does this relate to buy-sell agreements?
Buy-sell is when multiple partners or business owners buy life insurance on each other. That way if one dies, the remaining have funds to buy out the shares of stock.
They realize it’s the smartest way to avoid being in business with a spouse or heir they don’t really want to be in business with. Other than the personal traumatic loss of the human being, you don’t want to compound that and destroy the business or destroy relationships because of the inability to fund a buy-out.
However, you also can add key life to the buy-sell, which helps cover the economic loss with your partner gone.
Again, it’s important to have an agent who can help figure out the best way to structure these programs. It comes back to what you’re trying to accomplish. Are you trying to simply purchase the stock through life insurance? Or, are you trying to also fund for the economic loss that you’re going to have with that person not working at the company anymore?
Who should get this type of coverage?
A giant corporation or very large business is more likely to weather the storm of a loss of a key employee, than a smaller privately held organization that doesn’t have the wherewithal to have redundancy in its employee base. They are the ones that are truly at risk. A 500-employee organization is probably going to get along a lot better than somebody who has 50, but the large business is more likely to have this coverage.
Also, companies are more likely to get buy-sell coverage, than key life — even though key employees can have the same impact, or even greater, on the success of an organization than an owner.
People tend to focus on partners and owners, but if they really look at the profile of their employees they’ll see who could be replaced by simply hiring a recruiting firm and taking the time to hire the right candidate, versus those whose shoes they would really struggle to fill.
Actuary tables have become more accurate, life insurance premiums have gone down and life insurance products are more varied and easier to design, so you need to ask your agent about this coverage today.
Insights Business Insurance is brought to you by SeibertKeck