Keyman Insurance: What are downsides to employees?

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PostPosted: Thu Feb 18, 2010 2:12 pm   Post subject:   

I just love how the insurance guys here try to justify this insurance for the employer. Now why should an employee be proud of being considered a key man and consent to the company cashing in on his death?? Most modern day employers would trip over themselves trying to remove the deceased employees family health coverage and any other benefits he and his family are no longer entitled to. They can legally do all this to the deceased employees family and cause plenty of hardship to them while the employer cashes in? This type of insurance is so unethical in my view, that I think NO employee should ever consent to it!


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PostPosted: Thu Feb 18, 2010 3:14 pm   Post subject:   

I'm not so sure your understanding of key man insurance and it's applications is correct. Usually this form of insurance would include some sort of benefit for the insured and or the family, so the employer isn't the only one "cashing in" on the death.



Also, it's not just the "employees" in the sense I believe you are suggesting. Think about owners or CEO's of small corporations who are insured to ensure continuation of the business. Think about how much better you'd feel knowing that if you worked for a small company it's chances of survival following the CEO's or owner's death would be possible due to a cash infusion offered by life insurance.



http://www.lifehappens.org/reallifestories/house



That's a great example.



The comment about removing health coverage doesn't make a lot of sense. That would happen in the event of death or end of employment anyway.



I fail to see why you would consider this unethical, nothing you said so far seems evidence to make such an assertion. Please elaborate.

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PostPosted: Thu Feb 18, 2010 3:48 pm   Post subject:   

"I'm not so sure your understanding of key man insurance and it's applications is correct. Usually this form of insurance would include some sort of benefit for the insured and or the family, so the employer isn't the only one "cashing in" on the death."



Nope, most companies do offer life insurance to employees but that is totally separate from Key man life where there is NO payout to surviving family members.







"The comment about removing health coverage doesn't make a lot of sense. That would happen in the event of death or end of employment anyway."



Why doesn't it make sense to you? If an employee was to leave for another job, the employer wouldn't collect any cash rewards to offset any lost business or potential costs in replacing them, would they? Why should they then be allowed to collect in case of death? To me it's a cost of doing business, if someone dies who is a key person, then you move on and find someone else to replace them just as you would if someone decided to leave your firm for another. If a firm can throw your family off any benefit plans before rigor mortis even sets into your body, I see NO reason in the world why anyone should be consenting to the firm making money off your life if you happen to die.



Insurance sellers of course can't fathom the other side of the picture, but maybe they should at least try once in a while.


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PostPosted: Fri Feb 19, 2010 3:21 am   Post subject:   

Again, you truly don't understand the design of this sort of plan. It is completely possible to have a key person insurance policy while also creating some additional compensation incentive to the insured to have the plan, like a DBO, where the insured's family would receive a benefit. In fact, this has already been mentioned in this thread. Lot's of times there are certain retirement guarantees made for this sort of plan, and they can be funded with cash value life insurance.



Your comment about employee health benefits doesn't make sense because the suggestion that it's more of a cost to provide subsidized insurance premiums than there is in productivity from an employee shows a serious lack of understanding in labor economics. Especially with an individual who would be considered important enough to command a keyman insurance plan. Additionally, your further suggestion that the company is just as much out if the person quits than if they die forgets or ignores another critical point behind the additional benefits keyman insurance tied with additional non qualified deferred compensation brings to the table, and incentive to stay.



The way in which you are presenting this idea is as if the company simply demands the ability to purchase life insurance on the life of an important employee is only taking into consideration half of the plan design. Keyman insurance comes along with benefits from the company to the emloyee, it is not a one way street.



Whatever you've been told about designing this sort of plan is incorrect and/or not the usual application.

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PostPosted: Fri Feb 19, 2010 6:48 am   Post subject:   

Steve888 . . .



Can't really figure out your objection to the concept of key person insurance. It is exactly the same relationship as you would have with a spouse or a child, only it is a business relationship, not one of blood or marriage.



If, as husband to your wife/parent to your child, you were to die, those persons you leave behind suddenly lose the income stream you were producing for their benefit. I think most people understand that concept. The majority of people buy cash value life policies that continue to age 100 or beyond.



I seriously doubt you would posit that when a person stops working (retirement/disability), they would have to give up their insurance. Or if a divorce occurs. Or when a child has grown into an adult. And you would probably take unkindly to a suggestion from outside interests that suggest you should cancel your policy when any of those four things occurs.



So how is key person insurance any different? The employer is dependent on the revenue stream generated by a truly key employee. Maybe 1%, maybe 51%. The amount doesn't matter, necessarily. If the employee dies/becomes disabled, the revenue stream attributable to them could be impaired, and having insurance company money to cover the shortfall is precisely the reason an employer might consider such a policy. An employee who quits is analogous to the divorce scenario or to the child who runs off to the circus or to get married.



To terminate a policy early usually means an economic loss in terms of premiums paid vs. surrender value. You certainly would not want to be forced by someone else to have to sell your home when the outcome would be a net loss to you, right?



But that's exactly what you're talking about in your posts above. You cringe at the thought of a company receiving life insurance proceeds when even a former executive passes away. Would you similarly cringe at the thought of your receiving life insurance proceeds from a perfect stranger who picked your name out of a phone book?



The one thing that has been omitted in most of the posts above is the discussion of the purpose of life insurance, which is what I started this reply with. It is the replacement of lost income. You appear to believe that when a company receives a Death Claim Check, it has somehow earned a profit.



Well, that thought is ridiculous. Whenever someone dies, they leave a void that is nearly impossible to fill. If the void is filled with cash, the compensation is not a "profit" when it comes from life insurance -- because no matter how much money is paid out, something/someone of greater value has been irretrievably lost. No amount of money can make up for it.



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PostPosted: Fri Feb 19, 2010 11:25 am   Post subject: Keyman Insurance  

Keyman insurance provides coverage for any unanticipated loss of business due to the absence of any key employee. It provides compensation for:



1. It can provide the employer with financial compensation for hiring a temporary staff or for recruiting a senior staff in case the employer loses the key staff permanently.



2. It also protects the profits in the business which the employer loses due to the absence of the key staff by providing financial support.



3. It also allows the existing partners to buy the deceased person's shares.

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PostPosted: Fri Feb 19, 2010 6:20 pm   Post subject:   

Wow, typical insurance salesman lingo here! I am not making claims that the employer would "profit" from a policy like this, but in MOST cases they would benefit way MORE than the deceased family would, and there is my objection to this. And I am talking about a typical employee here and NOT a partner in a firm. Why would an employer have the right to legally throw the deceased person family off a health insurance plan while they collect a good amount of money from the deceased employee? Most people with common sense would not like this arrangement and why would anyone blame them? Yeah, of course you salespeople would say, "well this person should have had his own life insurance in effect to protect his family". I say BS to that. That has nothing to do with the fact that a company would get considerably MORE in most cases from the death of such a person than the family would which is my general objection to such plans. Thank goodness that laws were put into effect where employees have to consent to this before their employer can take out such insurance on them. If it were up to YOU salespeople, NO consent would surely be asked, since this would surely sell more policies for you.


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PostPosted: Fri Feb 19, 2010 7:48 pm   Post subject:   

"Typical insurance salesman lingo" is usually the code words for "people who actually know what they're talking about"



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PostPosted: Sat Feb 20, 2010 12:41 am   Post subject:   

Quote:
And I am talking about a typical employee here and NOT a partner in a firm.






I hope a time can come in the future when you can take a second look at what you are saying and realize how ridiculous it sounds. Let's start with the fact that we are talking about keyman (person for the PC types) insurance; rank-and-file employees would not be insured under this arrangement.



As max pointed out much more eloquently than I will, if you understand insurance (you know a process to indemnify loss) wanting to recoup loss in revenue from the death of an employee doesn't make them evil. The nonesense about medical benefits has no place in this discussion. If the family wants to idemnify itself from loss lets say from losing health insurance and now paying higher costs, as you've pointed out, they should have addressed that themselves. It's about R-E-S-P-O-N-S-I-B-I-L-I-T-Y. Should the company purchase life insurance on the emloyee and use it to pay for the family's medical care indefinitely?



What about pension funds?
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PostPosted: Sat Feb 20, 2010 5:56 am   Post subject:   

Quote:
but in MOST cases they would benefit way MORE than the deceased family would, and there is my objection to this. And I am talking about a typical employee here and NOT a partner in a firm. Why would an employer have the right to legally throw the deceased person family off a health insurance plan while they collect a good amount of money from the deceased employee?




Well, Steve, your real question is finally before us. You're talking apples, and we've all been trying to feed you orange juice.



A "typical employee" is NOT the subject of a key person policy. Far from it. As BNTRS stated above, if that "typical employee" (or even a "key person", up to and including the CEO or Chairman of the Board) is concerned about what happens to his/her family in the event of their own untimely death, a display of the little-exercised-in America-these-days PERSONAL RESPONSIBILITY is in order.



Are you deriding employers for not providing more than $25,000 or $50,000 in group life insurance? Perhaps you are not aware that any amount of group life death benefit in excess of $50,000 would be taxable to the beneficiary save for something known as "imputed income" wherein the employer attributes the cost of the insurance in excess of $50,000 to the employee, and the employee pays income tax on money never received, so a beneficiary won't on the money they do receive if the employee dies.



The true hardship here is on the employee who leaves the employer after having paid who knows how much tax on a benefit that disappears when the group insurance no longer applies to them. There is no mechanism in the tax code to provide that person with a refund of their "imputed income tax." So, like all other insurance we obtain and, in the best of circumstances, never use, we enjoy the peace of mind knowing that had something occurred, it would have been covered. Not having died leaves the family generally in a better condition than if a death occurs.



I'm sure you'll agree that most of us recognize $50,000 of life insurance is a paltry sum of money in the 21st century. Has been for a long time. If the family's need is for $100,000, $500,000, or $$?,???,000, then it is the individual's responsibility to go find it and pay for it with their own money. Your employer bears no responsibility in this decision . . . and, frankly, many employers truly regard group life as a non-benefit, it's just something that all their competitors force them to do, so they do it whether they like it or not and take the tax deduction for the value of the premiums they pay, since they DO NOT DERIVE ANY BENEFIT FROM THE GROUP INSURANCE they provide to their employees.



That's the same reason why employers DON'T get a deduction for any premiums they pay for key person insurance. They will receive a direct --tax-free-- benefit, even if the employee is no longer there. That issue has be discussed repeatedly above by me and others, and needs no further explanation here.



So, I hope you now realize, Steve, that your take on all of this is entirely one of misunderstanding the difference between group life and key person life insurance. Each has its place, and you are arguing as if they are one in the same when they are not.



As for your other comment about "legally throwing the family off the health insurance" and "collecting . . . money from the deceased employee", you clearly don't understand the entire premise of group insurance.



Group insurance (life, health, disability, LTC) is FOR THE EMPLOYEE. It is NOT for the family. The family is not part of the insured group, and if the employee leaves the company, vertically or horizontally, their entitlement to the group benefit ends.



Fortunately, most employers recognize the value of allowing employees to add their dependents to the plan, and the federal government used COBRA 1985 to force group plans to offer limited continuation protections for employees and those dependents who were also allowed to be covered -- although until just last year, there was never any financial help for the employees or their dependents.



ERISA (1974) and state insurance laws dictate who is eligible to be covered under a group insurance plan. The employer has little choice in the matter. They either cover 100% of their employees by paying the full cost of the insurance, or (in most states) they need to get 75% of the eligible employees to participate when the employees pay some or all of the cost of the insurance. Insurance companies often prevent the employer from putting all of the cost of the health insurance on the employees by requiring employers to pay at least $100 or 50% (which ever is less) toward the monthly cost of the employee's coverage.



Those same laws also tell employers how to identify those who are not eligible for coverage, like the dependents of terminated, deceased, or retired employees. So don't go around blaming employers or insurance companies for any of this. And please don't think what we've all been trying to tell you is "insurance salesman" hype. It's just the truth.



The truth can be unpleasant. But my clients appreciate my ability to tell them what's true, and educate them when they're wrong (10%) or if they simply lack the necessary knowledge (90%).



Hope this helps. And I hope we've been able to move you from the 10% column to the 90% column.


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PostPosted: Mon Feb 22, 2010 3:47 pm   Post subject:   

"A "typical employee" is NOT the subject of a key person policy."



That's what you think. Well, I work for a relatively small firm (less than 100 people) where I am the chief accountant who makes NO where near a salary like you people might have in mind. I am NO partner, don't have any shares in the firm, nor much say if any in the management of the firm. They are generally afraid that if I die, there won't be anyone who could quickly step into my shoes and do the job that I do, since the way things are done here are quite unique. They want to insure my life considerably more than I earn per year here. They may consider me a key person, yet I don't feel any obligation to the firm if I would happen to die. What guarantees do us employees have that the firm would even exist if one or more of the partners would die? None whatsoever, so why should an employee like myself worry about what is to happen once I am no longer around? Like I said before they surely won't be worried about my family if that was to happen, so why do I need to have my life insured for their sake? You guys look at it from the business perspective which is the only thing that seems to make sense to you guys, plus the commissions that you can make off policies like this and any other policies you sell. There is more to what's right and what's wrong in the world than what insurance salespeople's opinions happen to be.


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PostPosted: Tue Feb 23, 2010 2:06 am   Post subject:   

So that explains everything...your an accountant Laughing kidding





You are not a regular employee, you said yourself that you are the chief accountant and there is a very unique way of doing things around there. The company cares about what you do to the point of fearing loss if you die.



As I've stated several times, there are ways to design this sort of plan to benefit both you and your company. And if that avenue has not been traveled down then your boss has a bad agent.



There are deferred benefits that can be made available with life insurane while providing the company with protection from the loss it would suffer if you died, the company would be wise to look up a good executive comp. agent (you may not be considered or consider yourself an executive, don't get tied up in the the language, that's just what it's called most of the time).



It appears also a non qualified deferred compensation plan would be an excellent way to boost your opinion of your employer. It sounds as though you feel little loyalty to the company and could care less what happens to them. This sort of arrangement would also give you greater incentives to care about the company or at least your employment there.



So again, a good plan is designed to benefit both you (and your family) and the company. An ok plan involves protection for the company, and must involve a little selflessness on the employee's behalf, it happens.

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PostPosted: Tue Feb 23, 2010 2:19 am   Post subject:   

If you despise what the company is doing so much, you could always choose to try to find a job somewhere else. Just saying.



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PostPosted: Tue Feb 23, 2010 1:37 pm   Post subject:   

"As I've stated several times, there are ways to design this sort of plan to benefit both you and your company. And if that avenue has not been traveled down then your boss has a bad agent."



Thank you for acknowledging this! It is up to the company to make the right move here, and surely not my responsibility alone. If they showed more interest in my well being and my families, then maybe I would show more interest in theirs.



"If you despise what the company is doing so much, you could always choose to try to find a job somewhere else. Just saying."



I don't despise it, I just feel that loyalty should be a two way street. If they think that I am so important, they shouldn't only be protecting themselves in the case of my death.


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PostPosted: Thu Feb 25, 2010 3:59 am   Post subject:   

First off, this is a great thread. Entertaining, yet repetitive. Professional, yet somewhat brash and opinionated. Many excellent points, yet I'm starting to get bored.



In my professional and very experienced thoughts, as a person who presently has keyperson insurance on them, sold these things for years in my former life and now teach professionals the legalities and commonalities in these products (disability/life buy-sell, keyperson, deferred comp and all the related stuff), I can honestly say that I agree 100% with Max and BNTRS in this whole thing.



I've never seen an employer who was ONLY willing to go for the keyperson plan and NOT take care of the employee at the same time. Every single time I've either sold or reviewed plans of others as a consultant, there's always been a component that rewarded the employee. If you were the employee and your employer told you he wanted to put a $2.5 mm life policy on you, wouldn't you wonder "what's in it for me?" The first time it happened to me, I asked that question and that's when I learned about the wonderful world of deferred comp, 162 plans and all that cool "that's what's in it for me" stuff.



How can ANYONE dispute the validity and necessity of these plans? The person that does absolutely astounds me. Put it to you this way: Hey STEVE888- try on the shoes for a minute! You have a multi-million dollar business and you have a couple of employees that are critical to your success. If they die, you are totally screwed. Keypersons are generally defined as those who either contribute substantially to the profitability of the business or without whom the business would suffer "critical and irreparable" harm. So, you go ahead and NOT buy the coverage and one of those employees dies. Better yet- they die together in an accident on the way to a key business meeting. Shocked Let's keep going, shall we?



After the business meeting disaster because you couldn't handle the meeting without your boys (they're dead, remember?) you went back to your office. Eventually, you'll get around to thinking about how to handle what the dead guys used to handle. You'll find that their replacements aren't going to be found easily. Transition periods for high-end employees in these situations (read "get back to normal") is commonly a year or longer. In the meantime you're not getting the profits you were just a few months ago. Maybe not even close. Let's fast forward...you were so short-sighted that you failed to recognize the fact (!!!!) that the death of these key people have now caused your business to fail. Dramatic example? Actually, not really. I've seen it, and I bet Max and BNTRS have, too. Now how many employees are out of work due to your (hypothetical) short-sightedness and deliberate refusal to see the true purpose of these contracts? I guess I'm just curious as to WHY you're so opposed to these products??



Wait a minute... if you had purchased the proper coverage with an agent that knows what he's talking about, you could have easily weathered the financial storm and you wouldn't have put who knows how many employees out of work.



BTW- that's why they don't let the President and Vice-President travel on the same plane.



Those insured under these contracts are supposed to be invaluable to the company. Sure, you've heard stories about companies that have placed life insurance on employees who don't meet this definition, but there's plenty of case law on that stuff now and it doesn't happen that often anymore. Very Happy



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