Guest blog written by Drew Gurley of Redbird Advisors
Here’s something you probably don’t want to think about as a business owner:
What happens when you lose a key employee… it’s not pretty. About 8 in 10 business close in less than 3 years when a key employee leaves the business, whether through their death or other reasons.
It only takes a minute to define who that might be. If you’re the owner then you’re a good candidate. But, it could be other employees that are important components to your operation. Yes, there is an old saying that any person can be replaced, but it takes time and money. It also takes planning. Who should be insured? What type of insurance makes the most sense for the business? And, who can help you figure it out?
Defining “who” is probably easy. Evaluate each person and determine how much them being gone would impact operations or customers. Defining the type of insurance to protect your business is a little more entailed.
There are two broad options when it comes to using life insurance to fund a buy-sell or key man agreement.
- Term. It’s the least expensive and generally easiest and fastest to acquire. Think of term as the equivalent of leasing your life insurance. Your death benefits (the face amount of the policy you purchased) are secure, but you’re not building cash value. The insurance will expire based on the length of time—the “term”—you purchased. Some term policies will allow for conversion to permanent, or whole, insurance. Term is the most commonly used type of life insurance policy used for funding buy-sell and key man arrangements.
- Permanent. You “own” a permanent policy for life as long as you make the payments, regardless of health conditions. There are many variations of permanent life insurance, some with more complex investment components that allow for the build-up of cash value. Part of your premium pays for the insurance and part pays for the investment. Permanent life insurance will cost more than term. You can also use permanent insurance for employee retention by using the build-up of cash value as an incentive for the employee to remain employed. Permanent insurance is most commonly used to fund executive bonuses and deferred compensation plans.
The amount of life insurance you buy can be driven by many factors. Typically, most businesses purchase between 10 to 15 times the salary of a key employee. When used in a buy-sell or key man scenario, it’s all driven based on the valuation the key person brings to your firm.
The first step in getting your buy-sell or key man agreement funded is to get with your agent to discuss the options. It’s important to have an independent life insurance agent shop the market to give you the best chance of cost control. Shopping the market will provide you the best chance to fund your buy-sell or key man arrangement at the lowest cost while maintaining a high level of financial strength.
Once you know how much coverage you need to fund your policy, your agent can then walk you the process of getting the funding in place using life insurance.
At Insurance Resources, we are experienced working with business owners to think through the process of properly funding and planning for the loss of a key employee or partner. Call us today 727-345-0242 and we’ll help walk you through the process.
Drew Gurley is the Co-Founder of Redbird Advisors, a national insurance marketing firm that works with independent insurance agencies to improve customer experience. His work has been published with Forbes, Inc, Think Advisor, Insurance News Net and many more. Drew and Brian Ford have been working together since 2015 to bring additional value to the clients within Insurance Resources.