Clients needs a keyman insurance policy

Apr 2, 2019

  1. Zmurre
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    Zmurre Expert

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    I have a client who contacted me about getting keyman insurance on key employees and the pastors. Where do I start with keyman insurance? Could that be a regular whole life policy or a GUL?
     
    Zmurre, Apr 2, 2019
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  2. BADTROUT
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    I use term for Key-man, as no ones gonna work anywhere permanently. Sell whole to the person for their spouse and kids, but key-man is term for me all the way. Larger face amount lower cost and a finite conclusion.

    Don't be an order taker, I take annual contribution to the companies bottom line, recruiting costs, and the annual salary of the individual. I ask the decision maker how soon they can get an equitable replacement... after they answer, ask if they are sure. Once you get that down, come up with a number and produce multiple ends of the spectrum in quotes... what they asked for in your fact find, and up to 5x what they asked for in varying term limits. Lay it out n let em pick.

    Their need, their data, their choice, your sale (because no one will beat your counsel or price), your fat paycheck.
     
    Last edited: Apr 2, 2019
  3. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    I agree with all this for the most part.

    However, permanent policies can be very useful for KeyMan situations. Term is certainly used the most and is the standard "go to". But a lot depends on the company and their goals and operations.

    Some permanent policies offer a "Change of Insured" rider for Business Owned Policies. So a company could do a 5 pay GUL, and it could cover not just the current employee, but also their replacement if they ever leave the company.

    Very useful feature to know about. Especially for NQDC cases, but also for KeyMan.
     
  4. DI Guy
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    And don't forget to offer a Key Man disability option for a replacement employee if the key employee survives something but can't return to work.
     
    DI Guy, Apr 3, 2019
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  5. Robert Barney
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    Question: Company buys a no lapse UL for a key man policy on a 45 year old with agreement to give policy to insured upon retirement at 65. What determine the taxability of the benefit conferred upon that individual when they receive the policy and continue the premiums at retirement?
     
  6. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    The premiums would be deducted by the employer and considered a taxable benefit each year to the key employee who would pay income taxes on that annual benefit. (It's also possible that the company could pay the taxes on that benefit as well for a "double" 162 bonus plan.)
     
    DHK, Apr 4, 2019
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  7. Robert Barney
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    A bit confused here.

    During the 20 years the company owns the plan, and insures the employee, it is the beneficiary of any death benefit. Why would the 20 years of premiums be a taxable benefit to the employee if the employee got the policy in the 21st year? That doesn't seem right. Wouldn't it be based upon the cash in the account of the policy?
     
  8. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    I mixed it up. (I don't do much of any business insurance cases.) I confused an executive benefit/bonus plan with the key man policy.

    What we're really talking about is what InsMark calls the "Executive Trifecta": a key man policy, but of a cash value policy for an executive benefit plan.

    https://www.insmark.com/Shows/ExecTri/html5.html

    There's a bunch of different ways to structure it - just as there are many various business or non-profit entities that could benefit from it.

    In short - I don't know what the taxable liability would be. Generally, if the business deducted 100% of the premiums, then the entire plan would be taxable to the key employee... but I don't know if that's upon retirement, or only as income is taken, or what. I simply don't know.

     
    DHK, Apr 4, 2019
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  9. Robert Barney
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    If anyone else can help us out, I would like to hear about it.

    Let's simplify it.

    Company buys a 30 year term plan on an employee - for key man insurance.

    10 years later, employee leaves and is given the 30 year term policy. What is the taxable benefit (no CSV, it's just term).
     
  10. scagnt83
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    scagnt83 Worldwide Expert of Everything

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    You guys are confusing different types of planning here.

    The question in this thread, is about Key-Man policies for Risk Management purposes. Not NQDC purposes.

    This benefit is to protect the business, not employee. It is rare for an employee to receive a Key-Man policy upon severing service early.


    On to Roberts question about the 30y term, it all depends on the set-up of the policy:

    If employee gets partial benefit while employed (if their fam gets a % of DB):
    Then employee is taxed annually for the portion of premiums that fund their % of the DB.

    If the same policy is transferred to employee upon severance, then employee is taxed for the other portion of premiums that funded the remaining DB in prior years. (and is obviously on the hook for paying future premiums)


    If employee DOES NOT receive a % of DB while working:
    Then upon transfer to employee, they would be taxed for any premium paid in prior years. And of course be on the hook for future premiums.


    Generally speaking, key-man policies that are pure risk management, are usually not offered to employees as a portable option upon early severance. Sometimes they can be included in a severance package after a certain time period is reached.

    NQDC with CV is a different story. Then CV is used to determine taxable income for the employee.
     
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