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The primary reason businesses purchase
life insurance is to protect the company
from unnecessary risks. However, life insurance
has other valuable business uses as well.
Life insurance can be used to provide valuable
executive benefits or to fund corporate
buyouts. Cash value life insurance has
a unique combination of tax advantages
that are not available with any other financial,
investment, or cash accumulation product¹.
These advantages include: tax deferred
cash values, tax-free income via withdrawals
and loans and income tax-free death benefits.
 Term
Life Insurance
Universal
Life Insurance
Whole
Life Insurance
Term Life
In many cases, the reason for buying a key man policy
may be temporary. If so, term life insurance is generally
the best choice. Term life is the cheapest form of
coverage but is not designed to be a solution for
long term needs. There are several different forms
of term life insurance policies including annual
renewable term (ART), guaranteed level term, return
of premium (ROP) term, and lifetime guaranteed term
insurance. The most popular term life policies for
key person insurance include level term life and
lifetime guaranteed term. A description of each kind
of term policy follows.
Annual Renewable Term Life
Insurance (ART)
Annual renewable term is life insurance that covers
an individual for a one year period at a guaranteed
rate. At the end of each one year period, the policy
can be maintained but the premiums will increase
to reflect the new age of the insured. In most cases,
annual renewable term policies offer the absolute
lowest premiums over the first few policy years.
However, as the covered individual gets older, premiums
will gradually increase and in a very short time
be more expense than other level term options.
Annually renewable term insurance is best suited
for situations with very short-term needs of usually
2-3 years or less.
Instant Annual Renewable Term Life
Quote
Level Term Life Insurance
Level term life insurance provides guaranteed level
death protection at a guaranteed fixed premium for
a specific time period. Level term life is the most
popular form of key person term insurance and is
available in guaranteed periods of 5, 10, 15, 20,
25 and 30 years. Policy costs are based on the age,
gender, lifestyle and health of the insured as well
as the length of the guaranteed level term period.
Because the insurance company is “on the hook” for
a longer period of time, premium payments for guaranteed
level periods of 20 and 30 years are higher than
similar policies with guarantee periods of 5 or 10
years. In fact, depending on the insured’s
age at issue, the cost of a 20 year policy can be
double the cost of a 10 year policy assuming the
same face amount of insurance.
Level term life insurance is most appropriate in
situations where the insurance need is definite over
a specific time period. It should be used as a temporary
bridge that provides the low cost protection during
the period of need but can be dropped or expires
at the point when the coverage no longer becomes
necessary. Ten year level term is the most popular
policy for most key man insurance needs as the coverage
is inexpensive relative to other level term options
and provides a guaranteed rate for full ten year
period.
Instant Level Term Life Insurance Quote
Return of
Premium Term Life Insurance (ROP Term)
Return of premium term insurance offers affordable
life insurance protection with premium guarantees
and a unique feature that returns 100% of premium
payments at the end of the level term period. Depending
on the insurance company, ROP term builds guaranteed
cash values in the early policy years that will equal
the total premiums paid by the end level term period.
Cash values may be accessed prior to the end of the
level term period but only percentage of premiums
is generally returned.
Return of premium term insurance is also known as “cash
value term”. It is useful in key man situations
where the need for life insurance is temporary, usually
15-30 years, and the business is interested in getting
cash back when the insurance is no longer necessary.
If your company does not like the idea of paying
for level term insurance which builds no equity,
ROP term insurance is ideal as the cost is significantly
lower than traditional cash value insurance policies
but still offers a return at the end of the level
term period.
Instant Return of Premium
Term Life Insurance Quote
Lifetime Guaranteed Term
Insurance
Also referred to as “term insurance to age
100”, lifetime guaranteed term insurance offers
a fixed premium and death benefit for the life of
the insured. Unlike traditional term life insurance,
lifetime guaranteed term rates will not increase
as long as the guaranteed premiums are paid on time.
Lifetime term policies can be thought of as a “hybrid
policy” between level term insurance and traditional
whole life insurance. Premiums for lifetime guaranteed
term are cost effective like level term premiums
but the policy also offers the long term death benefit
guarantees associated with whole life insurance.
Lifetime guaranteed term insurance polices and lifetime
guaranteed universal life policies have effectively
bridged the gap between term life and whole life
insurance.
Many lifetime guaranteed term policies are actually
universal life insurance policies with guaranteed
insurance benefits for life. While a small cash value
may accumulate in these policies, cash value growth
is not an objective of this insurance. The main purpose
of lifetime guaranteed term insurance is to “lock
in” a low guaranteed rate that can never be
increased. As long as required premiums are maintained,
the policy will remain in effect at the insured’s
death. Lifetime guaranteed term insurance is the
most cost effective policy when the goal is to guarantee
coverage for life.
Lifetime guaranteed policies are best suited for
key man situations involving business continuation
planning and especially in funding buy-sell agreements.
Instant
Lifetime Guaranteed Term Insurance Quote
Universal Life Insurance
For key man situations where permanent insurance
is needed, universal life (UL) is a viable option.
Universal life insurance combines the advantages
of low cost term insurance with a tax deferred
savings vehicle similar to whole life insurance.
This unique policy design allows for flexible premiums
and insurance amounts which makes the UL policy
a versatile tool that is adaptable to changing
business circumstances. Common types of universal
life policies include flexible premium adjustable
life, guaranteed universal life, equity indexed
life and variable universal life. The type of UL
policy that is best for your company will be based
on the company’s objectives and reasons for
the insurance.
Flexible Premium Adjustable Life Insurance
Flexible premium adjustable life policies offer the
low costs of term life insurance with a side fund
that grows tax deferred. When purchasing a flexible
premium universal policy for key man purposes, the
primary objective is to provide a tax deferred cash
accumulation vehicle for retirement income with a
death benefit that can be paid to the key executive’s
family in the event of their death. These policies
generally pay a stated interest rate that can fluctuate
annually but is guaranteed to earn a set minimum,
usually 4%.
Flexible premium adjustable life is useful for key
man situations where long term coverage is needed
and the ability to grow cash value at a fixed interest
rate is desired.
Guaranteed Universal Life Insurance
Guaranteed universal life is similar to lifetime
guaranteed term insurance mentioned above. It provides
guaranteed coverage for a set period of time based
on the company’s needs. These policies build
cash value; however, the guaranteed death benefits
are the primary reason to buy a guaranteed UL policy.
They are useful in situations where term insurance
cannot be purchased due to the age of the key person
or when coverage needs to be extended over a person’s
lifetime.
Guaranteed UL policies are very useful in long
term planning situation such as business continuation
and buy-sell planning.
Guaranteed Universal Life Quote
Equity Indexed Universal
Life Insurance (EIUL)
Equity indexed life combines the benefits of a traditional
universal life policy with the ability to earn stock
market type returns without the downside risk associated
with equities. The policy works the same as flexible
premium adjustable life with the added option to
allocate cash values to indexed accounts such as
the S & P 500®, the Dow Jones Industrial
Average or the NASDAQ. Cash values are not invested
directly into equity accounts. The interest credited
to the cash value is based on the upward movements
of the selected index. If the index appreciates,
the cash value is credited with a given rate based
on the terms of the policy. If the underlying index
loses value, the policy is credited with a 0% return.
For a more detailed analysis of EIUL see, what is
equity index life insurance?
EIUL policies are best suited for key executive compensation
cases where supplemental retirement income is the
primary objective. They can also be used for funding
buy-outs among business owners.
Equity Index Universal Life Quote
Variable Universal
Life (VUL)
Variable universal life is a variation of the flexible
premium policy that allows for cash value to
be allocated in equity accounts similar to mutual
funds. VUL policy
values fluctuate based on the ups and down of
the
stock market. When premium payments are made
a portion goes to cover the costs of insurance
with
the remaining
balance going to the chosen investment accounts
available in the policy. With variable life,
the policy owner
has 100% of the investment risk. If the underlying
funds perform well, the policy will function
well. However, in down markets, VUL policies can
be dramatically
affected. VUL policies are a viable option for
cash accumulation in any key man insurance situation
as
long as the investment risk is understood.
Whole Life Insurance
Whole life insurance or permanent life is designed
to last a lifetime. Premium payments are locked in
for the life of the policy and coverage is guaranteed
as long as premiums are paid on time. With whole
life insurance, you are paying higher premiums early
in your life to offset the increased cost of coverage
at the older ages. Because of the long term guarantees
associated with whole life, it is generally more
expensive than any other type of life insurance policy.
Like universal life, whole life policies build cash
value that grows tax deferred. However, with permanent
life, the insurance company's investment, earnings
and claims experience has a significant impact on
cash value growth.
Permanent life insurance can be classified as either
participating or nonparticipating. With a participating
whole life policy, after all the claims and expenses
of the insurance company have been paid for a given
policy year, the policy owner is entitled to “participate” in
any surplus that remains. This surplus payment is
known as a policy dividend and is considered to be
a return of excess policy premiums. Dividends are
not guaranteed and there are no income taxes paid
on life insurance policy dividends. On the other
hand, nonparticipating policies do not pay policy
dividends and are credited with a stated interest
rate similar that changes annually. If your company
is considering whole life insurance, a participating
policy from a top rated company is always the best
choice.
If your business is looking to fund a buy-sell agreement
or providing executive benefits to help retain key
employees, whole life insurance may be the most efficient
option. When the need is long term and strong guarantees
are required, permanent life insurance should always
be considered.
Whole Life Insurance Quote
Summary
There are many different reasons to buy key man life
insurance. The type of key person insurance your
company needs will depend on the specific reasons
for buying the insurance. Consulting with an independent
insurance professional to determine the exact need
is the best strategy to assure you select the appropriate
key man policy. Call MEG Financial today at (877)
583-3955 with questions. An independent insurance
professional will go over your objectives and provide
custom quotes to match your specific needs.
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