Key Person Life Insurance
In general, the primary purpose of a key person life insurance program is to protect a business upon the death of an owner or key employee. In addition to the traditional indemnity sale, key person coverage is also used to fund entity buy-sell arrangements; to extinguish business loans, indebtedness, and lines of credit; to provide capital to hire replacements; to informally fund executive benefit obligations; and to create capital necessary for ongoing business needs.
    The first step in any key person sale is to identify the person or group to be insured. After you identify each insured (e.g. owner, employee, etc.), the next step in the sales process is to determine the key persons’ life insurance needs (i.e., type and amount of coverage required). As one might expect, this step takes time and careful case preparation.
    As you develop key person life insurance proposals for your clients, it makes sense to review the personal insurance needs of the owners and key employees. Realistically speaking, this review can provide convenience and personal protection for each insured and practical benefits for you and the insurance company.

Buy-Sell Funding
A buy-sell agreement funded with life insurance can be an effective way to protect the value of a business interest and to provide for the continuity of a successful business. In general, buy-sell agreements are drafted and funded as individual purchase plans (e.g., one-way or cross-purchase plans) or as entity purchase plans (e.g., a stock redemption plan).
    From a practical perspective, term insurance can be an attractive buy-sell solution if life insurance needs are relatively short-term and/or if cash flow is limited. Therefore, consider using term insurance for new business enterprises, for companies experiencing rapid growth, and for companies that are facing difficult or cyclical business conditions.

Loan Collateral Sales
In many cases, term insurance is used to “informally” cover business indebtedness. In other cases, a bank or other creditor might require a borrower to purchase insurance and pledge the policy as collateral for a loan. In general, when a lender requires that a borrower pledge a policy as collateral, a collateral assignment form is filed with the insurance carrier in order to protect the lender’s interest under the policy.
    For example, let’s assume that a company wishes to borrow $5 million from a local bank. As a condition for making the loan, the bank asks the company to purchase a $5 million term insurance policy on the owner’s life and to execute a collateral assignment in the bank’s favor. If the business owner were to die unexpectedly while the loan remained outstanding, the insurance proceeds would be used to satisfy the outstanding loan balance, and any remaining proceeds would be paid to the company as key person life insurance proceeds.
    The easiest way to determine the amount of indebtedness facing a business is to review its balance sheet. It also makes sense to determine whether the business owner realistically expects to borrow significant amounts of money. If borrowing or business expansion is likely to occur, additional amounts of coverage sold today may be an effective hedge against any potential insurability problems that may occur tomorrow.

Executive Bonus Sales
In order to reward and retain key employees, many companies offer selective and discriminatory life insurance benefits through the use of “executive bonus” plans.
    Under an executive bonus plan, the employer generally pays the annual premium on a policy that is owned by and currently taxed to the employee. In general, executive bonus plans are used primarily to fund personal coverage needs and may also be used to fund buy-sell arrangements.
    An executive bonus plan is a valuable benefit program since IRC 79 typically limits the ability of group term life insurance plans to provide discriminatory benefits in favor of highly compensated employees. In addition, experience has shown that many key employees tend to be underinsured.
    Bonus plans are also cost-efficient because these “discriminatory” insurance benefits are only being provided to a select group of the company’s key employees. Moreover, employer outlays are generally tax-deductible for income tax purposes assuming reasonable compensation issues are met.
    From a sales and marketing perspective, raising the topic of an executive bonus plan can be beneficial to you. In putting the topics of personal insurance and executive compensation issues squarely on the table, you’ve created a mechanism for developing high premium multi-life sales, since these same employees may be prospects for new sales and referrals in the future.

Personal Insurance Sales
In addition to business insurance requirements, many owners need significant amounts of personal insurance coverage. Personal insurance needs vary depending upon the individual’s goals, family income needs, financial condition, the size and complexity of one’s affairs, and other important factors (e.g., charitable giving goals). In some situations, single life or survivorship coverage owned by an irrevocable life insurance trust or other third party can be an appropriate estate planning recommendation.
    Although a detailed discussion of personal planning issues is beyond the scope of this article, you may wish to keep a few more points in mind. First, don’t assume that your business clients have an advanced understanding of their personal and business insurance needs. Second, take the time to meet the client’s tax and legal advisors and to discuss your insurance recommendations. Third, don’t overlook the insurance needs of spouses and other family members.

Summary
If you are looking to build your business insurance practice, you may wish to consider using term insurance to build relationships with business owners and their key employees. In later years, leverage these relationships through term conversions and cross-selling initiatives, and by asking your clients for referrals. Good luck! q
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Brian McKenna, J.D., CLU, is an advanced sales attorney for Travelers Life & Annuity in Hartford, Conn. He assists financial professionals with developing comprehensive estate planning, retirement planning and business insurance strategies for their high-net-worth clients. McKenna can be reached at (860) 308-6901 or by e-mail at brian1.mckenna@citigroup.com.