Key Man Life Insurance: What Is It and Who Needs It?

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Often, the difference between successful and unsuccessful businesses can come down to the determination and vision, as well as financial backing, of primary individuals within the company. These individuals become key to the success of the company, as a whole. But, what happens if that person suddenly and unexpectedly dies? A crew without a captain will sail off course, if they aren’t unified in a plan of succession.

Morbid as it may be, it is a fact of life and an unavoidable topic for businesses. Although you can never replace a “key man” you can propel their life’s work to greater heights through insured financial support and agreed-upon courses of action. Still, none of this will miraculously occur without careful planning and frank discussions with all invested parties. Let’s explore some of the FAQs of this type of insurance to see if your business is a likely candidate and what steps you can begin to take to secure your legacy.

Which Businesses Benefit From This Kind of Coverage?

By and large, small and developing businesses are the most likely candidates, as much of their revenue may be tied to their growth and expansion, whereas established businesses may have insulated themselves for the potential of a key man loss. Small business models often rely on re-investment, both financially and individually as part of their winning strategy. They are dependent on certain individuals and their contributions to make the machine operate correctly.

How Does the Coverage Work and How Much Is Needed?

Just like most insurance, a policy is acquired, the premium is paid and, if the policyholder passes, the company collects and is hopefully given a lifeline to manage the loss of their key person. Which brings us to the question of how much insurance is needed. For most businesses, the worth of a key man needs to be assessed, based on how much they add to the company, as a whole. Therefore, the more key they are, the more coverage the company should purchase. And don’t just consider what they bring to the company, but what the company would need to survive, if this person was suddenly lost. Overall business debt, investors’ returns and employee retention are some of the most common concerns and questions businesses purchasing this insurance will discuss.

What Are the Potential Drawbacks?

Overall, key man life insurance is an excellent safety net for smaller businesses, but there are some potential disadvantages to be considered. or instance, premiums aren’t tax deductible and, when a key person passes, creditors could make a claim to the premium pay out. In addition, if a key man leaves a business, their coverage can’t travel to their new business. However, there are some options becoming available to alleviate the potential of wasted premium payments. Talk to an agent today to see what your business’ options might look like.

Key man insurance is an excellent way to safeguard your small or medium-sized business from the catastrophic loss of a vital member of the business. It may be something that people avoid discussing because of the sensitive nature of the decisions, but it is much less comfortable or possible, when an actual loss occurs. Have these discussions and make rational decisions when all parties can contribute and develop a plan for the near and distant future of your company.

11 Things You Should Consider Before Purchasing Life Insurance

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For most American families, purchasing life insurance is an important financial purchase. Upon the named insured’s death, the beneficiaries will receive a death benefit that will, hopefully, ensure their financial security for years to come. With over 2,000 life insurance companies to choose from, and a myriad of policies to sift through, choosing the right coverage can prove to be a daunting task. With that in mind, we’ve put together some tips to ensure you get the best value for your money.

1) Evaluate Your Insurance Needs

Most consumers are under the impression they only need life insurance if they have dependents. The truth is, most of us stand to benefit from owning a life insurance policy. Whether you’re young and single, the primary breadwinner, or a stay-at-home mom, you should consider all the facts before making such an important decision. If you’re unsure, meet with an insurance agent. He or she can assist you in evaluating both current and future needs and provide you with the information necessary to make a decision that helps you rest easy at night.

2) Take the Time to Really Consider How Much Coverage You Need

How many individuals depend on you financially? Are you the primary source of income for your family? If you’re a stay-at-home-mom, what does the family depend upon you for from day-to-day? What does your family’s financial portfolio currently look like? How will your loved ones pay for final expenses and outstanding debts upon your death? These are all questions you should consider when determining how much coverage you need.

3) If You Have a Current Life Insurance Policy, Assess it Carefully

Do you currently have a life insurance policy through your employer? Or perhaps your parents purchased one for you when you were a child? Speak with your agent first before canceling anything. There may be an option to change your policy to fit your current needs. Or, it could have hidden coverage that adds significant value to your portfolio.

4) Term vs Permanent

There are currently two basic types of life insurance: term insurance and permanent insurance. A term policy typically offers you more coverage for a lower premium. Coverage is offered for a set time period and the policy does not build up cash value. Permanent policies come with a higher price tag, but remain in place for as long as premiums are paid. They also build up cash value, which can be borrowed against at any time. Each policy has its own set of pros and cons that should be considered carefully before purchasing.

5) Evaluate the Future of Your Policy Before Purchasing

When evaluating potential policies, ask your agent to generate a year-to-year display of values and benefits for each. How quickly does the cash value grow? Does one beat out the other over time? These comparisons will assist you in determining which policy offers the most value for your dollar.

6) Discuss Your Rider Options

Most policies offer additional coverage in the form of riders. Some offer access to your death benefit before you die, while another allows you to use the policy’s cash value to pay for long-term care expenses. When considering policy options, be sure to inquire about these riders, as many are very low in cost compared to the benefit they provide.

7) Get to Know the Companies You’re Considering

When applying for a policy, you’ll be asked several questions regarding your health. It only makes sense then, that you should do the same. Research the companies you’re considering. How financially stable are they? How long have they been in business? Hopefully your insurance policy won’t be needed for quite some time, so it’s important that you partner with a company that is in it for the long haul. A.M. Best is a great resource, as is your state insurance department.

8) Understand the Policy Before Purchasing

It’s important that you read the fine print before signing on the dotted line. Are there certain instances where death benefits can be denied? If so, what are they? Are premiums level, or do they vary from year to year? How long before cash value starts to build? What portion of the benefits or premiums isn’t guaranteed? Meet with your agent to clear up any confusion before making your final purchase.

9) Consider Your Beneficiary Carefully

Choosing a beneficiary sounds simple, right? While it’s pretty straightforward most of the time, you do want to consider it carefully, as there are instances where the wording could result in unexpected tax or legal issues. Check out our blog Tips for Choosing a Life Insurance Beneficiary for some helpful advice.

10) If You’re Turned Down for a Policy, Don’t Give Up

Don’t get discouraged if you’re turned down for a policy; there are plenty of other options out there. In fact, the Vista Life team specializes in finding a policy for consumers who’ve been turned down in the past. While there are some instances where an individual is uninsurable, this is not the norm.

11) Review Your Policy Every Few Years

Life happens and family dynamics change. If you’ve had any major changes occur, meet with your agent to discuss. This will help ensure the policy serves it’s purpose should the unexpected occur.

Tips for Choosing a Life Insurance Beneficiary

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As you probably already know, there are multiple steps to purchasing a life insurance policy. After obtaining quotes and selecting the policy and coverage that’s right for your family, you’ll be asked to answer some medical questions and possibly undergo a medical exam. During the application process, you’ll also be required to select a beneficiary for your new policy. While this is typically pretty straightforward, there are several potential financial, tax-related, and legal issues that could emerge if your beneficiaries aren’t named properly.

To avoid these potential complications, it’s important that you carefully consider who your beneficiary should be. If this is a decision you’re struggling with, the following advice should help clear up any questions.

But first, let’s start with the basics.

Beneficiary Basics

First, it’s important to know that there are two basic types of life insurance beneficiaries.

  1. Primary beneficiary: A primary beneficiary is the first person(s) to receive the death benefit should the insured die. If the primary beneficiary dies before the insured, the policy will automatically defer to the contingent beneficiary.
  2. Contingent beneficiary: Also known as the secondary beneficiary, the contingent beneficiary is eligible for the death benefit if the primary dies before the named insured.

To avoid any complications and ensure the death benefit payout process goes smoothly, it’s recommended that you select both a primary and contingent beneficiary when setting up your policy.

In addition to the two types of beneficiaries, there are two classes to consider as well.

  1. Revocable beneficiaries: With a revocable beneficiary, the policy owner has the right to modify the beneficiary designation without the preceding beneficiary’s consent.
  2. Irrevocable beneficiaries: Under this class, the policy owner cannot modify the beneficiary designation without written consent by the original beneficiary.

Due to the potential legal complications that could arise from opting for an irrevocable beneficiary, the most straightforward option is revocable.

Now that you have a better understanding of the types of beneficiaries, how do you choose? You can name any of the following:

  • People: This could be a family member, legal guardian, or even a business partner.
  • Estate: If you choose your estate as the beneficiary, the death benefit will go to the Executor of the estate. It’s important to note that your estate can only be named if you’ve drawn up a last will and testament. If this is the path you’re considering, take a moment to discuss any tax implications with your agent, financial advisor, or accountant.
    Trusts: If you have a trust already set up, naming your trust is an option.
  • Charity: Charities can be named as either the primary or contingent beneficiary.

Many policy owners have more than one beneficiary they would like named on their policy. There are two approaches you can take in this situation: per stirpes or per capita.

Per stirpes: Under this option, the death benefit would be divided equally among the named beneficiaries and/or their surviving children. For example: You designate your two daughters, Allison and Nicole, as beneficiaries of the policy. Allison dies before you, and you pass away next. Nicole would receive 50% of the proceeds and Allison’s surviving children would receive equal amounts of the remaining 50%.
Per capita: Under the per capita option, the death benefit would be equally divided amongst all the surviving beneficiaries in the lineage line. For example: Using the above scenario, assume Allison had three children and Nicole had none, when you passed away. The proceeds would be divided equally between Allison’s three children and Nicole. Each beneficiary would receive one-fourth of the insurance death benefit.

The Dos and Don’ts of Life Insurance Beneficiary Designation

The following are a few tips to keep in mind regarding your policy’s beneficiary.

  • DO consider who has the most to lose financially when naming your beneficiaries.
  • DO name both a primary and secondary beneficiary.
  • DO designate proceeds to be paid out in percentages rather than a fixed dollar amount.
  • DO make sure your will and designations aren’t conflicting.
  • DO notify anyone who has been named as a beneficiary.
  • DO consider the language of your policy to ensure your wishes are properly carried out.
  • DO review your policy every few years.
  • DO make necessary amendments to your policy when a major life event occurs. For example: marriage, divorce, birth, or death.
  • DO discuss any tax ramifications with an agent or advisor before listing your estate as the beneficiary.
  • DON’T make generalizations, such as “spouse” or “children.” Doing so could lead to complications during pay-out time and leave your grieving family to define your intentions. Be specific.
  • DON’T name a creditor as a policy beneficiary.
  • DON’T name minors unless a guardian has been designated for them.
  • DON’T complicate things. If you have a separate named insured, owner, and beneficiary, this could result in higher tax payout.

If you’re at the beneficiary consideration stage of the process, you’ve made a great deal of important financial decisions to ensure your family is protected. It would be a shame if your intentions weren’t carried out, simply because you overlooked an important detail. Or for your family to be embroiled in a legal or tax battle that could have been avoided. Discuss your options with an experienced agent before signing on the dotted line; and don’t forget to review your policy every few years.

When a Loved One Refuses to Discuss Life Insurance

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Life insurance isn’t exactly the most pleasant of topics to discuss. I’m pretty sure it’s the talking point at very few, if any, cocktail parties. In fact, broaching the subject of death would probably be considered tasteless in some social circles.

In many settings, I can understand this mindset. But, what if it’s a family member who doesn’t have life insurance and refuses to tackle the issue?

Well, the good news is – you’re not alone. According to the 2016 Insurance Barometer Study by LIMRA, more than two thirds of adults in the U.S. don’t have an advisor or agent to guide them in planning for their financial future and are unsure where to turn.

The unfortunate news, is that life insurance is a critical component to the financial planning of anyone with a family and/or dependents. Not tackling this subject head-on could leave your loved ones in serious financial trouble. At the very least, it could force your family to make some difficult decisions during an already devastating time.

If you have a spouse or loved one who refuses to discuss life insurance, it might be time to take a different approach. Here are a few pointers that might help you open up a dialogue on the subject.

Understanding Why Will Help You Lead a More Productive Conversation

When trying to tackle any difficult issue, it’s important to understand where the other person is coming from. This will provide insight into what information you should bring to the discussion and your empathy will help you determine how.

There are a number of reasons why people choose to avoid the life insurance discussion. Perhaps the biggest reason, is that it forces them to face mortality. The discussion of death isn’t exactly a light subject, so it’s something most of us tend to avoid whenever possible. It would make sense, then, that the topic of our own death would be downright unnerving.

Cost is another deterrent for discussing life insurance. While this is understandable for the family that’s barely scraping by as it is, LIMRA’s Barometer Study also reveals that 80% of Americans overestimate the price of life insurance, with Millennials overestimating by as much as 213%. Armed with the right information, many consumers are willing to give up that daily Starbucks coffee to ensure their family is financially secure. While it might be difficult to imagine fitting it into your budget, those living paycheck to paycheck have the most to lose from an unexpected, uninsured death.

Lastly, it’s common for many to feel they simply don’t need the coverage, or have enough through their policy at work. What is the death benefit for your policy through work? $10,000? $20,000? The average funeral costs between $7,000 and $10,000. That doesn’t leave much for your family to handle the major life changes they’ll be facing in the coming years. One should also consider that the average American changes jobs ten to fifteen times in their lifetime. Your employer-provided policy cannot transfer with you from job to job.

What You Can Do

Now that we understand some of the reasons why your loved one might want to avoid the subject, let’s look at a few things you can do to help them see the light.

Do Your Homework Prior to Sitting Down

There’s a lot to consider when it comes to purchasing a life insurance policy. Part of your spouse’s resistance is the fear of the unknown, and not wanting to take the time to learn. Your best bet is to take a more hands-on approach, conducting much of the research prior to sitting down. Take a moment to visit the Vista Life Plan website for information regarding the different life insurance options available and to work up some quick quotes.

Our blog also offers tips on determining how much insurance you need, and a variety of other subjects.

Show Them the Numbers

With a majority of America unaware of how much life insurance really costs, it’s important that we dispel the myth that it’s unaffordable. Term life insurance offers consumers a flexible, inexpensive option and generally carries a rider allowing for conversion to a permanent policy within a certain timeframe. Since it’s affordable and easy to understand, this is the safest option to introduce to your reluctant spouse.

Wait for the Right Time

If you already know life insurance is a touchy subject in your household, it makes sense that you would wait for the appropriate time to discuss it. Set aside some quiet time to meet with your spouse. Eliminate any other distractions and stresses and be prepared for a little resistance. Offer the facts and do your best to not sound defensive. Remember, you’re asking him/her to discuss something they’re uncomfortable with; you can’t expect them to jump onboard without any opposition.

Why the Self-Employed Really Need Life Insurance

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So, you’ve started your own business. Things are going well. You even tackled the all-important issue of ensuring your family has health insurance – something none of us should be without. Congratulations, you’ve achieved the American Dream!

But, have you really addressed all the issues business owners should address? Have you purchased a life insurance policy? Let’s take a look at some reasons why life insurance is more critical for the self-employed than for the salaried individual.

Your Family is Left Behind to Pick up the Pieces

Whether the plan is for your family to continue the business after your death or sell it, there are loose ends to be tied up. During this transition period, they’ll need additional capital to ensure things go smoothly.

Let’s consider this for a moment. As the business owner, you offer invaluable skills; skills that are instrumental to the company’s success. Your administrative duties include more than just writing checks for bills each month. You’re in charge of sales and marketing and have forged strong relationships with local distributors. If your family and/or business partners lack these necessary skills, hiring an experienced outsider could mean the difference between the business’ success or failure.

Plan on selling the business upon your death? A life insurance policy can help keep the business afloat while the details are being settled.

Are There Business Loans to Be Paid Off?

If you’re like most entrepreneurs, you probably took out a small loan when opening your business. It’s a great way to raise enough capital safely and quickly. What will happen to that loan should you die unexpectedly?

If the banks wrote off a loan every time the borrower passes away, they would be out of business in no time. To protect their investment, many lenders require individuals to secure a life insurance policy for the full amount of the loan as part of the loan requirement. Even if this wasn’t a requirement for your loan, it’s a great strategy for ensuring your debts are paid once you’re gone, and that your loved ones don’t sacrifice in the process.

Key Person Coverage Protects Your Business Partners

Handling the business’ affairs after your death will be difficult. Your family must make critical decisions, all while trying to deal with the emotions of losing a loved one. Add business partners to the mix and you have a potential recipe for disaster.

The simplest way to move forward is for your partner(s) to take over the business, offering your family an agreed-upon price. The company continues to run smoothly and your family receives additional money to help them get back on their feet. The most effective way to handle this strategy is for each partner to maintain key man life insurance, with the other partners named as beneficiaries. When one partner passes, the surviving partners use the death benefit to buy out the deceased partner’s share.

Make sure you research more than a few insurance agents and their business practices, when looking for a new policy. As with most critical life decisions, you want to make sure you have options and can find the best fit for your individual needs. It’s also important to gauge the interest of the agent and relative pricing of the plans you’re considering.