Key Person Insurance - Rock Solid Finance with David Worrell

If given the choice, I think most business owners would rather discuss?well?just about?anything?other than life insurance. Who wants to think about their own death?

But if you love your business, care about your employees and want to protect your business partners, then you should be thinking about it. ?Now? while you still can.

Most business owners buy?key person life insurance?at some point in their career. This type of insurance helps your company overcome?the loss of its most valuable employee? You!

[Note: Don't confuse this with a policy to fund your?buy-sell agreement, which we have written about before. ?A key-man policy?is not typically used by the company (or your partner) to buy out your share of the company.]

Getting the right deal can be tricky, however, even for an experienced agent. ?So let?s take a careful look at the kinds of policies you?ll want and the ways to avoid getting ripped off.

What to Ask for
Key person insurance works best with either a?whole life?or?universal life insurance?policy. Both of these are called ?cash value insurance? policies ? meaning that your company receives?both a death benefit?and?a cash value reserve?amount that can be used any time (and for any reason) during your life. Great, right? ?You don?t have to die!

While term insurance can be used, it comes with risks. Most states don?t allow policies on people over age 80 or 85, and normally there is?no cash value?to a term policy. This is a lose-lose: if you no longer need the policy, there?s nothing to withdraw? and if you live past 85, there?s no payment to help replace you. Either result is a bad deal.

Make Your Policy Fit Your Circumstances
Cash value policies?are not all the same. ?You can pick a policy that emphasizes a high death benefit or a policy that emphasizes a high cash value amount. If you plan to die at your desk and really want to leave in style, go for a large death benefit. ?If you plan to retire or close the business in the next 10 years, think about accumulating a larger cash value in the policy ? that way you can?withdraw the value without actually, uh, dying.

• For the larger death benefit, purchase something called a ?straight whole life? or ?ordinary whole life.? A universal life policy with secondary guarantees or ?guaranteed universal life? policy also works very well. Ask your agent about this helpful twist.

• If you?d rather accumulate some cash value?(while still getting a decent death benefit of course), choose a ?participating high cash value whole life policy.? These policies are sometimes referred to as??10 pay whole life? or ?20-pay whole life,? and they pay dividends that help accelerate the cash value growth as well as the death benefit. ?(NOTE: for universal life policies, be sure you get a ?minimum death benefit/maximum cash value? schedule. This minimizes the costs of the insurance while maximizing the cash value.)

Avoid Being Ripped Off
While most insurance agents are honest and decent people, there are always a few bad apples in the industry. Sadly, the number of dishonest (or just plain ignorant) agents seems to be growing. ?Protect yourself with these simple tips:

• Ask about commissions:??If you are purchasing a policy to maximize cash value, the agent?s commission should almost never be more than 50 percent of the first year?s premium. Forty percent or less is standard. For maximum death benefit policies, a reasonable commission for the agent is 90 or 100 percent of the first year premium. Anything over these amounts should be considered an ?expensive? policy.

• Budget more:??When purchasing universal life, it?s always a good idea to pay more than the listed target premium in your policy?s illustration and contract, regardless of your company?s goal for the policy. The target premium is the?minimum?premium required to make the contract work. Never assume the minimum will be sufficient.

• Don?t be fooled by quotes.?While most insurance agents will tell you to obtain several quotes, quotes can be highly misleading if you?re only looking at the ?illustrated? rates for the policy. Agents love to show you the these, but an illustrated rate only show you how the policy works, not how it will actually perform. Instead, compare two quotes by looking for a table in the illustration called the ?cost surrender index.? This will tell you how much you?re paying per $1,000 of insurance.

Cashing Out
When you ? or your key persons ? die, a key-person insurance policy will pay off and the proceeds will go to your company. ?The proceeds are tax-free because the premiums are non-deductible (you paid taxes on the premiums all along, so you won?t pay on the benefit).

The pay-out can be used for any purpose, but of course the whole point was to find a replacement CEO and train her to fill your shoes ? as big as they might be. ?Your staff or heirs could also use the money to wind-down the business, bonus employees, or maybe just throw a giant party. ?You can?t control how they will spend it, but you can make it possible for those left to continue the business without you.

Dedicated to your (endless) profits, ? David Lewis

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Guest writer?David C. Lewis, RFC, is the founder of Twin Tier Financial, a financial planning and coaching company based in Raleigh, N.C. To read more articles by David, or if you have any questions about this article, please visit:?www.twintierfinancial.com.

photo credits: LorE Denizen and?torpore, both via photopin cc

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