Key-Man Coverage Ownership

[Rob Hoopengarner]

I have 3 clients who are buying 3 Mil of personal coverage and 3 Mil of Key man coverage. LLC will be the owner and beneficiary.. Client is asking why cant he just personally buy 6 Milliom and then designate 50% to the wife and 50% to the business... I told him there could be tax problems,, but I dont know how to explain the problem. Can someone help me? Thanks Rob

 

[DHK]

I guess he likes to co-mingle his finances a lot between his personal checkbook and the LLC? Ugh.

Here's a Key Man Policy In Action from The VSA.

 

[Allen Trent]

I have 3 clients who are buying 3 Mil of personal coverage and 3 Mil of Key man coverage. LLC will be the owner and beneficiary.. Client is asking why cant he just personally buy 6 Milliom and then designate 50% to the wife and 50% to the business... I told him there could be tax problems,, but I dont know how to explain the problem. Can someone help me? Thanks Rob

I am not sure there is a tax implication to merely make the LLC a 50% beneficiary, but I can think of 3 or 4 other issues of doing that:

1. Carrier may not allow it because the LLC would have no insurable interest in his personally owned life policy
2. If he is personally the owner, he has all rights to change the policy or cancel it or change the beneficiary. The LLC would suffer if he personally changed the beneficiary to 100% his family, but the other 2 clients didnt do the same with their policies
3. The IRS has required consent forms for key man policies & that wouldnt occur if he merely did a personal policy & listed LLC as 50% bene
4. 1 single $6M policy instead of 2 separate $3M is likely a bad idea regardless of ownership if it is term or WL. This is because the face cannot be lowered. So, if the client has a big drop in income, business problems, bankruptcy, divorce they may want to get rid of 1 of the 2 policies. But if it is all on 1 policy, they likely cant do anything about it.

 

[Tahoe Ray]

I am not sure there is a tax implication to merely make the LLC a 50% beneficiary, but I can think of 3 or 4 other issues of doing that:

1. Carrier may not allow it because the LLC would have no insurable interest in his personally owned life policy
2. If he is personally the owner, he has all rights to change the policy or cancel it or change the beneficiary. The LLC would suffer if he personally changed the beneficiary to 100% his family, but the other 2 clients didnt do the same with their policies
3. The IRS has required consent forms for key man policies & that wouldnt occur if he merely did a personal policy & listed LLC as 50% bene
4. 1 single $6M policy instead of 2 separate $3M is likely a bad idea regardless of ownership if it is term or WL. This is because the face cannot be lowered. So, if the client has a big drop in income, business problems, bankruptcy, divorce they may want to get rid of 1 of the 2 policies. But if it is all on 1 policy, they likely cant do anything about it.

All great points but just FYI, there are quite a few term carriers that allow face reductions.

 

[Allen Trent]

All great points but just FYI, there are quite a few term carriers that allow face reductions.

That is good to know. Are you aware of some of the carriers by chance?

 

[Tahoe Ray]

That is good to know. Are you aware of some of the carriers by chance?

Lincoln, Securian, LGA, Pac, Protective...there are definitely others.

Each carrier has their own guidelines though and some are only "company policy" (like AIG). You also have to stay above the minimum.

 

[Allen Trent]

Lincoln, Securian, LGA, Pac, Protective...there are definitely others.

Each carrier has their own guidelines though and some are only "company policy" (like AIG). You also have to stay above the minimum.

Excellent. Thank you

 

[Robert Barney]

The total cost of 2 = $3 million dollar policies is so close to the cost of a single $6 million dollar policy it would seem silly to try to work out a partnership on a single policy.

Example: lowest price 20 year term, male age 50, preferred Plus non-smoker:

$3 Million
AXA Equitable: $4,725 X 2 = $9,450

$6 Million
AXA Equitable: $9,375

So $75 more to have 2 policies.

 

[Allen Trent]

The total cost of 2 = $3 million dollar policies is so close to the cost of a single $6 million dollar policy it would seem silly to try to work out a partnership on a single policy.

Example: lowest price 20 year term, male age 50, preferred Plus non-smoker:

$3 Million
AXA Equitable: $4,725 X 2 = $9,450

$6 Million
AXA Equitable: $9,375

So $75 more to have 2 policies.

Exactly. The only duplication in having 2 policies instead of just 1 is the $60- $100 policy fee embedded in each policy. This is usually the case once you exceed each carriers sweet spot of pricing on face amount that can tend to have pricing break points at 250k or 500k or $1M, etc,

Most term should be laddered in multiple policies with matching durations to the protection need of a debt duration, spousal protection duration or duration minor children need support.

 

[Robert Barney]

Exactly. The only duplication in having 2 policies instead of just 1 is the $60- $100 policy fee embedded in each policy. This is usually the case once you exceed each carriers sweet spot of pricing on face amount that can tend to have pricing break points at 250k or 500k or $1M, etc,

Most term should be laddered in multiple policies with matching durations to the protection need of a debt duration, spousal protection duration or duration minor children need support.

There might be larger cost savings if you were buying two $250,000 policies, versus one $500,000 policy, but even then the numbers hardly warrant divided ownership where tax issues are concerned.

I highly recommend you don't do things that might confuse IRS auditors. Remember, if they could get a real job, they wouldn't be working for the IRS.