Key Person Coverage Is Not For Investor Reimbursement!
Farmers have always planted hedges of trees or bushes around fields to limit loss due to exposure of crops or livestock to wind and weather. Gamblers hedge their bet with a smaller opposing wager to limit any loss on their original play. The term has common use in business when a “counter transaction” is designed to mitigate the loss should an investment go south.
Key person life insurance is a hedge against the loss of a person capital contributors depend on to grow their equity interest. Insurance carriers will assist in so long as the purpose is to limit loss versus simply refunding investments upon the death of a critical employee.
Consequently, it is important to understand a carrier’s financial underwriting guidelines to manage client expectations.
Consider:
- Carriers start with a multiple of the key person’s compensation. Many start with five times but can be talked into ten. Some will go higher if you know where to look.
- The multiple is based on total compensation, not just W-2 cash income. This requires providing the right information with the application.
- Start-up business’s are tough. If initial compensation is low, the insured’s true worth must be established by other means.
Some carriers allow additional coverage for a percentage of a business’s long-term liabilities if a case is made that loss of the client will inhibit servicing the debt.
- Coverage may be allowed if there is an agreement to redeem any ownership interest from the estate of the insured.
- The disability of the key person can also severely affect the company. Discuss insuring against the loss of revenue and payment of overhead expenses during an absence.
Approved key person coverage is not tied to the equity stake of an investor. Let us assist you effectively package your next business application with the carrier whose financial guidelines best suits the amount of insurance your client wants and needs. Call Tom Virkler, JD – Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.
For What It’s Worth: Underwriters will tell you that their goal is to, “Avoid making someone worth more dead than alive.” Some manage to do that without help from a carrier. The estates of both Elvis Presley and Michael Jackson continue to recognize income each year of over $100,000,000.