Two posts ago I wrote about Key Person insurance and how it can protect the business (and business owner’s family) by having the company buy life insurance on the Key Person. Upon the death of the Key Person (usually the owner, but really defined as the primary “decision maker” of he company), the death benefit gives the business the resources to hire a replacement, among other options (subject to the business continuity agreement). If you missed the post, you can access it here.
So the question then becomes what type of insurance can be utilized for Key Person insurance? While term insurance can certainly be used (pure death benefit, lowest cost), it has its limitations; by virtue of its name, term insurance is for a limited number of years. Usually, after the initial term, the cost rises dramatically, should the owner decide to keep it in force. Furthermore, there is no cash value buildup involved, so accessibility is virtually nil. Universal Life insurance, one type of permanent insurance, can be another option, as it does build cash value over time, by virtue of any premium payment over the cost of insurance going to cash value. However, since premiums can increase over time, there is potential for cash value growth to be limited with the same premium being paid, especially the older the insured gets. In this scenario, there is potential for a rising cost of insurance necessitating using cash value to pay for the insurance component alone, meaning a policy may lapse over time if the cash value is depleted. Whole Life insurance is the most predictable of the three types, allowing for guaranteed cash value buildup. With this type of permanent insurance, a guaranteed flat interest rate along with level premiums for the life of the policy gives the owner confidence in knowing how much they will have to pay during the life of the policy, as well as how much cash he or she will have at any stage of the policy.
By utilizing Whole Life, the cash value that accumulates over time can be used by the company, usually in one of two ways. One way can be if the company needs to make a one-time, large purchase. By taking out a loan against the cash value, the company can make the one-time purchase without the need for a bank loan or utilizing a line of credit. Although the insurance company will charge interest for the loan, it’s usually at favorable terms versus a bank and partially offset by the guaranteed interest paid by the insurance company. Further, since the loan against the policy actually comes from the insurance company’s general fund, the policy’s cash values continue to grow in full. And finally, repayment of the loan is on the terms of the policy owner, allowing for flexibility of repayment. If the loan is not paid back by the time the insured dies, it is simply deducted from the death benefit.
The second way cash value can be utilized is as a type of line of credit to the business. Since some companies have the same recurring, annual expenses (usually materials), by taking out a loan (usually annually) and paying it back at year end, the cash value can accumulate over time by virtue of the guaranteed interest rate (with a typical line of credit, no interest is paid, but charged to the business).
Certainly there’s more to these cash value concepts, but If you’d like to see how cash value utilization can complement your company, please contact me at d.babecki@db3insuranceservices.com or give me a call at 941-704-3134. As always, thank you for reading and let me know how I can be of service.
About David J Babecki
David Babecki is the Owner/Founder of DB3 Insurance Services and has over 20 years of experience in personal insurance, proudly protecting clients against outliving their money, stock market risk, and of course, insuring their lives against the unforeseen.
David started his career with Raymond James & Associates in 2000 before becoming an independent agent where he offers a number of services to solve client needs. David has spent the majority of his life in the beautiful Tampa Bay area where he currently resides with his family.
David is a Licensed Life Insurance Agent FL # D053146
The above article reflects the opinions and thoughts of David J. Babecki. The information contained in this material is believed to be reliable, but not guaranteed. It is for informational purposes only and is not a solicitation to buy or sell any products which may be mentioned. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.
Please note: all guarantees and/or promises are based on the claims-paying ability of the respective insurance company.
