Talking Key Person Insurance With Your Local Businesses
If 2020 taught us anything, more consumers are thinking about having a contingency plan in their lives in 2021 by reviewing their life insurance coverage and long-term care insurance, and possibly rethinking how they save for their retirement using safer products like annuities.
AIP Marketing Alliance also thinks 2021 provides some more sales opportunities to approach local small business owners and larger corporations to start a conversation about key person insurance. Businesses nationwide were affected by the COVID-19 pandemic last year, and even this year, as everyone is looking to rebound from the economic challenges.
Key person life insurance reimburses a business for economic loss when an employee who is critical to the success of the business dies. Key employee life insurance is not a specific type of policy, but a way to use life insurance to offset a significant business risk. It also has benefits both during the key employee’s life and after his/her death.
You can design a key person life insurance policy through one of your carrier relationships as the concept is not tied to a specific type of life insurance or product. Instead, this contingency plan is tied to the owner/key member of the executive team responsible for decision making, or to a significant contributor to the company’s sales volume or operations.
Typically, the loss of an owner/key person would cause disruption in sales/production, missed sales opportunities, and potential credit difficulties. A life insurance policy covers this “effect” of losing that employee’s impact and hopefully allows the company to maintain business as usual until the loss of that key person can be resolved.
Getting Started with a Prospective Business
- After talking with the business owner or management team, the company then talks to the owner/key person about purchasing a specified life insurance policy for that employee and receives his/her consent.
- The business applies for life insurance on the key employee’s life.
- Once the life insurance policy is approved, the business is the owner and beneficiary on the life insurance policy for the key employee.
Determining the Policy Amount
- Contributions to Earnings Method: The business estimates the key person’s contribution to yearly profits and multiplies it by the estimated number of years the employee would have worked. The result can be appropriately discounted to establish a basis for how much life insurance to purchase currently.
- Cost to Replace Experience Method: The business takes the key person’s compensation, subtracts the amount of salary attributable to routine duties, and then multiplies that number by the years required to bring a replacement up to the key employee’s level of experience. Add to this the expenses associated with recruiting and hiring a new employee to determine the appropriate amount of life insurance.
The Benefits of Key Person Insurance
Key person life insurance serves a number of uses benefiting the business and the key employee, both during the key employee’s life, his/her retirement, and after the employee’s death. Death proceeds are generally exempt from federal income tax when the notice and consent requirements have been met.
If the insured employee doesn’t die while employed, the policy’s cash value is available to the business. Key person life insurance demonstrates financial stability to creditors. If the key employee is an owner of the business, the policy can help fund a buyout of a business interest when death occurs. If the employee lives, the policy’s cash value can be used to provide employee compensation.
AIP Marketing Alliance has some consumer-approved materials to share with your potential business prospects and clients. If you have any questions about Key Person Insurance or other business insurance concepts, please contact our Business Development team at (800) 783-5206 Press #2 or email email@example.com.
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2041 E. Square Lake Road, Suite 100, Troy, Michigan 48085-3897
For more than 35 years, AIP Marketing Alliance (AIPMA) serves as a premier life insurance and annuity distribution partner to provide full-service support to independent wholesalers, brokerages and agents from our Troy, Michigan office.