Protection Products

Take a New Look at Key Person Insurance


Protection

Key person insurance isn’t a new concept. But, that doesn’t mean we can’t take a new look at it.

A few months ago, one of my advisors had a business owner client who approached him with concerns about key employees. The concern was two-fold. First, as is typical with key person scenarios, the owner was concerned – if his top buyer were to pass away unexpectedly, what financial impact would that have on his business? And, what plan could he put in place to stem the tide and reassure his clients all would be OK? Second, due to the specialized nature of this business, if this employee would leave and go to a competitor, what would that do to his bottom line and long-term growth opportunity?

Experienced buyers are vital to this client’s business, but hard to come by. He’s lost buyers to competitors in the past, so he asked, “What can I do to entice this guy to stay with me until he’s at least 65?” We thought about it … and we got creative.

In a typical key person scenario, term insurance is usually an advisor’s gut instinct. But, we went with something that has the potential for a greater impact:

  • The owner purchased an indexed universal life policy on the employee’s life and overfunded it, giving the owner potential tax advantages down the road
  • The employee signed an agreement stating if he stays with the company until he is at least 65, he will get bonus distributions from the policy for 10 years – a nice supplement to his retirement income
  • Should something happen the employee before he retires, the company would receive the benefit to help with the cost of finding a new buyer
  • If the employee breaks his agreement and leaves for a competitor, the business owner can surrender the contract and keep the cash value.

This plan got resounding support from everyone – the business owner, his CPA and the employee – because it accomplished everything they needed. In fact, it was so effective, the owner decided to use the same strategy for three more people at his company.  

The lesson here? Make sure you’re not always going with run-of-the-mill solutions. Don’t assume the client will want basic coverage – make sure you understand exactly what they’re looking to accomplish. The result could surprise you.

 

About the Author

As an Ash Brokerage RVP, Mike Pompei works with industry-leading financial advisors, agents and centers of influence, assisting them with the creation of strategic solutions for their clients while enhancing their practices. With more than 25 years of experience in accounting, compliance, financial and relationship management, he has knowledge and skills to help in all areas of planning, including client consultation and point-of-sale support.

business owners key person