Key man insurance
February 14, 2005
Q:
Recently, a colleague mentioned that he had bought “key man” insurance for one
of his top employees. I didn’t want to let on that I didn’t really know
what that is. Could you inform me? -- Murray, NY NY
A: I
could try, but since I am not the insurance expert, I thought I would go to
someone who is - Byron Udell, the founder and CEO of AccuQuote. Founded in 1986,
AccuQuote (www.accuquote.com) has become
one of the leading insurance companies in the country, increasing revenues an
average of 40 percent a year for the past 10 years.
When I asked Udell about “key person” insurance (that is the proper term these
days), he gave me this scenario: “Let’s say that a business has an employee who
is critical to its profitability - someone who is firmly entrenched and
important. Someone who is integral and critical to the business. It might be a
top salesperson or a manager that is vital to the business.”
He went on, “Then ask yourself - what would happen to your business if that
employee were to pass away?” If that employee is indeed “key”, that is, he or
she creates significant revenue, revenue that would take a while to replace,
then their loss would likely trigger an economic crisis in your small business.
Enter key person insurance. Think of it as life insurance for your business.
If you do lose a key employee, the policy will pay you for your lost profits,
thereby buying you some time to replace the individual and get things back up to
speed.
Key person insurance can also serve as an incentive to retain vital employees.
Because you can divvy-up the benefits under the policy any way your wish, you
can offer part of any proceeds to the employee’s family. In that manner, key
person insurance can become part of your benefits package.
How much should you buy? Udell says that typical benefits run between $250,000
and $1 million. There are two ways to determine the right amount of key person
insurance to buy. The first rule of thumb is to buy 8-10 times the employees
salary. But Udell suggests that the second method is better: Look at the
economic value of an employee to your business and ask yourself, “How much money
would I lose if something happened to this person?” The answer to that question
tells you how much insurance to buy.
I know, you are probably thinking that this all sounds well and good, but buying
that much insurance is likely cost-prohibitive. Nope. Udell says that rates for
key person insurance are “dirt cheap right now.” In fact, rates are 60% less
than they were 10 years ago. Back then, to insure a 40 year-old employee with an
average 20 year, term key person policy, it would run you about $995. Today,
that same policy would run you less than $400 a year.
When I asked if he had any insider tips for someone buying key person insurance
for the first time, Byron Udell mentioned two things. First he said, be sure to
buy the right amount. Your broker can also help with this determination. Second,
“don’t overpay.” What you want is a broker that works with multiple carriers and
can shop your needs around. That will ensure that you are getting the best deal.
What is your most powerful business asset? Most employers say that it is their
employees. With key person insurance rates as low as they are these days, it
would be shortsighted not to insure your most important business assets.
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Today’ tip: There are two things I
especially liked about AccuQuote. First, you can get an instant online quote at
the company’s website. Second, the company is able to quote some great rates by
offering a choice of more than 1,600 products through roughly 140 life insurance
carriers.
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