Key to the Business Market - Key Person Insurance
A Discussion with Two Top Producers
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I love the idea of key person insurance because it so clearly reflects the core concept behind life insurance itself. One of the most basic of reasons for a business to purchase life insurance is to protect itself from the financial hit it is almost certainly bound to take should one of its key people die. Seems like common sense, doesn’t it? But if so, why aren’t more companies insuring their key people and why aren’t more producers active in this market?
I’m not sure I can answer the questions about why more people aren’t involved, but we can certainly explore why some of the best producers in the business are involved.
Recently I asked two of the best producers I know, Guy E. Baker, MSFS, CLU, of Irvine, California, and Brad Elman, CLU, of Los Altos, California, about their experiences in the key person market. They were both gracious enough to share a lot of detail on how they’ve succeeded in this market, beginning with the decision to enter it.
Why Key Person Insurance: Sometimes it seems that one of the biggest challenges for a producer is figuring out which of the many opportunities and markets make the most sense for them. There is simply no way you can be an expert in every realm of the insurance world, so I asked both Guy and Brad why key person insurance became a focus for them.
For Guy, that question was putting the cart before the horse. “The business market is like a huge, complex puzzle,” Guy explained. “It is a matrix of opportunity waiting for the right advisor, agent, or consultant to come along and solve the problems. A great entry point is key man -- or key person -- insurance. But, before we look more deeply at key person and the opportunities, it probably would be prudent to discuss exactly what key person insurance is.
“The most obvious answer is that key person insurance is life insurance coverage payable to an entity -- whether it is a corporation, an LLC, or a partnership -- for the economic loss sustained if the insured were to die while employed.
“Remember,” Guy cautioned, “a primary principle of life insurance is that the beneficiary has to sustain a proven economic loss if the insured dies. That loss has to be measurable and ethical.”
To illustrate just what he means by that, Guy said, “This would never happen, but to make the point, suppose an automobile salesperson sells company cars to the owner of a large corporation. The owner dies and the automobile salesperson loses a customer and all of the future sales. Is this insurable? After all, the owner was a source of substantial and consistent income for the salesperson and the dealership. But is there an insurable interest? Obviously not, because there was no legal relationship between the parties. Insurable interest is based on some kind of legal or moral obligation, and an economic loss to that person or entity should the insured die. Without insurable interest, life insurance ceases to be a social construct and becomes a form of gambling. The fact that life insurance is moral, ethical, and provides a social good is why the benefits have been preserved legislatively for many decades.”
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