Keyman Insurance: What are downsides to employees?

Posted: Tue Dec 01, 2009 08:10 pm Post Subject:

If an ex-boss has you murdered for the insurance proceeds, he won't collect if he gets caught, but you will still be dead.

I would not be comfortable with someone having a financial incentive in my death.

If your ex-boss developed a drug habit and was losing his business and his family, don't you think that he might be willing to take a chance that he might not get caught?

Key man coverage is very important. I take out policies on my key people. I'm looking at this from the point of view of the key man.

Believe it or not, some business owners are criminals and they will commit criminal acts if they think that they can get away with it.

Posted: Wed Dec 02, 2009 12:04 am Post Subject:

Max, please forgive me if I forgot that California is a different country. From the California INSURANCE CODE SECTION 10110-10127.18 regarding insurable interest requirements when purchasing a life insurance policy on the life of another person.

Cal. code section 10110.1.(e) states:

(e) Any contract of life or disability insurance procured or
caused to be procured upon another individual is void unless the
person applying for the insurance has an insurable interest in the
individual insured at the time of the application.

Posted: Wed Dec 02, 2009 03:00 am Post Subject:

Worrying about an insurable interest having to do with a beneficiary seems to be pretty useless since the beneficiary can always be easily changed.

Posted: Wed Dec 02, 2009 07:22 am Post Subject:

InsTeacher . . .

You don't owe me anything, including an apology. It's discussions like this that make us all better at what we do. And I would never stoop to calling you or anyone (other than some of the horrible drivers on our freeways here) an idiot. I was going to post the CIC section you did, but the "leginfo" website was down all last night and into this morning, and my copy of the Code was not at hand.

I have bigger concerns about beneficiaries (which isn't even how this thread was started), insofar as most agents don't have a good understanding of the whole subject. I've gotten into some pretty heated discussions over agents being told by their managers to not list minor children as beneficiaries, but to have the owner/insured name an adult who will be responsible for the kids to receive the money.

How much worse can bad advice get?

Oh! BTW . . . it's Texas that's a different country. They actually allow prelicensing instructors to take the insurance exams once a year so they can see what they need to teach! Here in California, 2 or 3 years ago they made it a $10,000 misdemeanor to reveal exam content in any manner once you step into the examination site.

California is just plain in the toilet as the result of partisan politics and labor union influences in Sacramento and elsewhere around the state. My guess . . . the state will be in bankruptcy within 5 years.

Posted: Thu Feb 18, 2010 02:12 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!

Posted: Thu Feb 18, 2010 03:14 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.

Posted: Thu Feb 18, 2010 03:48 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.

Posted: Fri Feb 19, 2010 03:21 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.

Posted: Fri Feb 19, 2010 06:48 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.

Posted: 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.