Business owners make lots of common mistakes when buying key man insurance, but usually only because they missed a simple little item throughout the extensive process. When buying a key man insurance policy, there are certain mistakes that you must avoid if you are to obtain the best coverage. Below is a list of the more common misconceptions with key man insurance. A careful review of these points will help you identify the policy that is right for your company.
A List of Common Mistakes When Buying Key Man Insurance (Which You Can Avoid)
- Overlooking the Need for Key Man Disability Insurance
- Most businesses seeking to purchase key man insurance only buy life insurance and never even consider disability insurance. The fact is, at most ages, the threat of a disability is significantly higher than the likelihood of death and the financial impact on the company is just as severe. Key man disability insurance is therefore just as important as the life insurance.
- Misunderstanding the Financial Justification Required to Buy Key Person Insurance
- Most business owners or companies considering key person insurance do not realize that there must be financial justification to obtain the insurance. In other words, the amount of insurance coverage that is available is strictly based on a realistic and justified risk of loss to the company. If the amount of insurance applied for does not accurately reflect the inherent risk, then available coverage may be limited. For example, a start-up company with no revenues will be hard pressed to insure their CEO for $5 million simply because the company’s investors are requiring it. The need must be justified by a realistic risk of loss.
- Key Person Insurance Premiums are Not Deductible¹
- In most cases, proceeds received from key person life or disability policies are received tax free. Therefore, policy premiums should not be deducted as a business expense.
- Not Allowing Enough Time to Obtain a Policy
- The process of securing a key man insurance policy takes time. Whether you are considering a life or disability policy, a good rule of thumb is 4-6 weeks for approval. Don’t make the mistake of waiting until the last minute. Start your key man application early and give yourself enough time for the insurance company to approve the policy.
- Don’t Designate a Bank, Investor or Lending Institution as the Beneficiary of a Key Man Policy
- It is never a good idea to name a bank or lending institution the beneficiary of a key man insurance policy. A collateral assignment form can be used to assure that, in the event of a death or disability of a key person, a lender or investor will receive the payoff amount of any loans or notes due with the balance of funds being paid to the business. By using a collateral assignment, the bank or lending institution never receives more money than the amount equal to the funds owed at the time of death or disability of the key person.
- Not Disclosing Important Health and Lifestyle Details
- When applying for key person insurance, it is important to provide accurate and detailed health, hobbies and lifestyle information. We represent most of the nation’s top insurance companies and each has their own “niches” where they are competitive. If all significant information is disclosed up front, the insurance company that will offer you the most competitive policy based on your specific circumstances can be easily identified. However, if previously unknown details are uncovered during the underwriting process, the likely result will be a higher priced policy or having to reapply with another company to secure a better rate.
- Not Choosing an Experience Insurance Agent
- Working with an experienced independent agent is critical to obtain the best key man insurance for your business. While key man insurance is simply life and disability insurance, there are significant differences in the way the insurance companies view these cases. Over the last 13 years, MEG Financial has assisted thousands of businesses all across the country with their key man life and disability needs. During this period, we have gained a specialized knowledge in this field and have developed the experience required to assure that your business gets the right policy at the absolute best value.
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¹ The above tax information is for information purposes only and is provided to explain the basic tax treatment of life insurance based on the Internal Revenue Code. Any individual or entity considering any life insurance policy should consult with their own independent adviser that understands their particular tax circumstances. This information is not intended to be tax or legal advice.
