Key Terms:
Key person life insurance – An insurance policy a company buys on the life of a person critical to the company’s operation. It helps protect against financial loss if an owner, partner, or other employee critical to the future of the company were to die. The company pays the insurance premiums and is the policy’s beneficiary, should the person die.
Term Life – Term policies last for a specific amount of time (your term), and there is no cash value accumulation. The death benefit is only payable to the beneficiaries upon the death of the insured person during the term. Because it costs less and is more straightforward it’s a good option for many people.
Whole Life – As long as the premiums are paid, this type of coverage is active for your whole life, guaranteeing the eventual payout of a death benefit. It can cost 5-10X more but if the premium is within budget, it can be a good option for anyone interested in insurance that accumulates cash value and doesn’t end. (You can find more about this here)
Transcript:
Craig Vattiat (00:00):
This is probably something that folks are most folks are not aware of. It’s called key person life insurance. And what it does is it protects your company. In the case that a person that’s really critical to the success of your business dies. Um, it can also be available as key person, disability insurance, uh, in the case that they’re disabled and they can’t continue in that capacity as a key person. Um, that key person could be you as the business owner, it could be a partner, it could be really a salesperson or a project manager that’s really critical to your success. So it doesn’t matter exactly who it is. You just identify who that person is and, and purchase this policy. And if that key person dies, you know, think about what will it cost or what will it take to replace that individual, you know, will the business be able to weather that transition?
Craig Vattiat (00:56):
And so, um, one other consideration around that is if you are in business with the partner and that per partner dies, um, if there’s ownership rights that need to be bought out potentially from an air, then this would allow you to resolve that issue. Uh, and so that’s why it might be important to consider looking into this, just like our standard, um, personal life insurance policies. You can purchase term life insurance, or what’s called permanent life insurance. Uh, term life is just gonna be for a fixed period of time, and it’s not gonna have a cash value that accumulates over time. Um, it is gonna provide you with a lower premium through the term of that policy. Um, and permanent insurance it’s often called universal or whole life, um, is gonna have a higher, yearly cost than term life. Uh, and that will have a cash value.
Craig Vattiat (01:52):
Yeah. Term life insurance is going to be, uh, written. It’s a policy that’s written for a very, uh, specific period of time. So it might be a 30 year term. Um, it’s gonna provide you coverage in the case that you die or whoever it is that you’re ensuring here, if they die within that term, and you’re paying your premium, that your policy will pay you out, um, in the event that that person dies during that term. Okay. And then there’s some benefits to, to consider there, you know, you, you might have a specific time period where you really need that protection, right? So let’s, let’s kind of think about a personal life insurance policy. So not a key person, life insurance policy, but let’s say if you’re a parent, um, and your child really needs support between, you know, the ages of being born to 25, then a 30 year term, um, might make sense because it’s providing you with the coverage that your kid needs, right? This, this policy is really for them. Um, or let’s say a partner, a spouse that is a survivor here. Right? Mm-hmm <affirmative>.
Craig Vattiat (02:58):
And so in that term, you’re really protecting your family, your loved ones during the period that they need it the most, when they’re the most vulnerable. Now, once your child is older, hopefully they’re able to be self-sufficient. And so the term, um, life insurance is no longer needed. Right? Sure. So you’re really protecting yourself during that time there, the benefit is that the policy is gonna be less expensive on a yearly basis. Okay. So whereas a, a permanent policy potentially could cover you for your entire life, you know, as you age, though, the cost to keep that policy is going to increase.
Collin Gabriel (03:38):
Oh, I see. Right. Because more and more stuff comes up.
Craig Vattiat (03:41):
Yes. And you’re more likely to die. Right. Mm-hmm <affirmative>, I mean, we we’re, we’re gonna get there. And so as you get older, um, that that premium is gonna increase dramatically.
Craig Vattiat (03:51):
Um, but the benefit is that it does potentially carry through, um, as long as you really want that to be in place for, um, one other really important distinction is that there’s a cash value component to a permanent life policy. So that’s a, an amount that accumulates during your premium payments. And then let’s say you decide to terminate your policy. Well, then you can cash out, um, that portion of your policy and that’s, um, money that you can take with you. Oh, okay. So again, keep in mind that, that the key differences there is the term life insurance is gonna be really much less expensive to, um, to have in place. Um, and your payments should be consistent, you know, uh, you will be cuz it’s a life insurance policy. You’re gonna have a health assessment at the start of it. And depending on your health, uh, you might not be able to, to be covered, um, or your policy, your premiums might be more expensive because of your health conditions. So again, something to consider there, if, um, you feel like that’s an, uh, a risk that you might face at your business.