- Hey everybody. It's Randy Pierson with another episode
of Selling Life and Annuities.
I'm the vice-president of Life and Annuities
for Gordon Marketing.
And today I've got one of the newest members
of our team, Ray Parman, Life and Annuity RVP.
And today we're gonna be talking about
key person insurance and business planning scenarios
and why it's so important. Stay tuned.
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All right, Ray, key person insurance.
Give us just a brief synopsis.
What is it and why is it important in the business planning?
- Yes. Absolutely, Randy.
Key person insurance
is probably one of the most straightforward,
easiest to plan for insurance related items
for a closely held business.
And really what key person insurance is,
is company owned life insurance on a key employee.
And for the purpose of if that key employee
if the worst were to happen and they were to pass away
that business would receive the death benefit
and be able to use that to help
and replace that key employee for the sake of continuity
for that small business.
- So you're telling the viewers out there
that a business can own life insurance
on one of its employees,
be the owner of the policy and the beneficiary?
Receive the death benefit?
- Absolutely. Absolutely.
- So how does that work exactly?
I mean, what are the dynamics there?
- So the business will take the insurance policy out
on a key employee.
The key employee is the insured obviously,
and then the business is gonna be the beneficiary.
So that death benefit is gonna go
straight to the business owner
or the business I should say. And for them to use
again, for any sort of continuity
to remain in business basically.
- Okay. So obviously this sounds like something
that could be very advantageous
to a business owner to have this coverage on a key employee.
Are there restrictions, are there rules
that they have to adhere to?
I mean, what are the limitations, if any.
- The limitations are really focusing on
what exactly is a key employee.
So we're now looking at maybe the rank
and file type employees.
We're looking for the business owner themselves,
executive management, maybe high performing sales person,
maybe somebody else in the business
that has a unique set of skills
or unique knowledge about that business.
That's really who you would kind of define
as a key employee.
And I also often ask people
to think about this kind of scenario too,
where if say you had to shut down your business today
and start over tomorrow across the street,
which employees would you take with you?
And that kind of gives the business owner thinking about
who those key employees truly are
and it helps them identify
those individuals and move forward.
- Yeah, I would imagine that determining a value
of that key employee, right? I mean
quantifying, what's the appropriate insurance amount
is a part of this process.
Is that easy? Is it difficult?
What are some of the nuances about that?
- Yeah, it's pretty straightforward.
A good rule of thumb is usually kinda go out
with about 10 times the person's income
is a place to start, but that's gonna also depend
on also the industry that they are in
and also the impact that they have on the bottom line
of business too. There, are some considerations
to keep in mind, but a good starting point is 10 times
their salary or their income.
- What about disadvantages?
Are there any disadvantages or pitfalls
that an advisor and their client need to be aware of
with this cover? - Yeah. Good question.
You know, first and foremost,
the premiums that the business pays are not tax deductible.
So, unfortunately, that's not the case
but what they are gonna receive in turn
if the worst did happen would be a tax-free death benefit.
And then secondly, the only other disadvantage
that comes to my mind is the fact that
there's nothing really tying that he employee
to the business so they can kind of move on
in their own accord if they so desire to do so.
So those are really the two main disadvantages
that I'm aware of.
- So we are talking life insurance here.
Do you find that most of these policies
are written utilizing term insurance or permanent insurance?
- So, good question.
The most straightforward solution is
to utilize a term policy which fulfills the need immediately
for the key employee,
but where you can also turn key employee insurance
into as well as split dollar and ultimately
a non-qualified deferred comp,
because these key employees are key for a reason
and that business owner probably wants them to stick around
as long as they possibly can.
And so why not turn this into a strategy
where the business is protected
but also this key employee has a golden handcuff
or is incentivized to stick around,
hopefully to retirement.
- So it sounds like there's some flexibility
in the planning and you mentioned split dollar
and non-qualified deferred comp.
We can get into some pretty complex planning issues here
but all springing from making sure that that business owner
understands that they can
ensure the value of that key employee.
So a for agents that are watching this video,
is there anything that we can put in their hands
to help them better understand business insurance
and how to get into this key employee space?
- Yeah. We actually have a lot of resources.
We have some that are guides to help
bring somebody into the fold.
If you're new to working with the business owner market it
if it's something that they want to get into
or maybe people are coming to them asking about that.
We can certainly help with that,
with the training and education,
we even have fact-finders too that allows them to glean
that information so we can help analyze that
and hopefully help put together a good plan
for them. - Fantastic.
So if you're an agent out there
and you'd like to sell bigger face amounts, bigger premiums
and get into this business owner planning space
make sure to reach out to Ray for a fact-finder
and our guide to business insurance.
He'll put that in your hands
and certainly assist you in selling more insurance
in that arena. But with that, we've run out of time.
So we're gonna call this episode
of Selling Life and Annuities to an end.
I wanna thank Ray for participating today
and thank you for watching this video.
Make sure you click subscribe down below this video
and tune in every Tuesday
for a brand new episode of Selling Life and Annuities.
We'll see you then.
(cheerful music)