IUL for Key Person Executive Planning

Key person insurance is a specialised type of life insurance that protects a business from the financial fallout caused by the death or critical illness of an essential employee. This individual might be an owner, top executive, or someone with irreplaceable skills vital to the company's success.

The purpose of key person insurance is to protect a business from the financial consequences of losing a vital employee. This key individual could be a founder, CEO, highly skilled specialist, or a top salesperson whose unique contributions are essential to the company's success. Key person insurance provides a financial safety net in the event oft heir unexpected death or critical illness, ensuring the business has the resources to:

• Offset lost revenue: Compensate for the loss of profits or sales generated by the key person.
• Manage transition costs: Cover the expenses of recruiting and training a suitable replacement.
• Protect against debt: Help repay loans or other financial obligations tied to the key person.
• Maintain stability: Reassure investors, clients, and partners that the business has a plan to weather the loss of a key player.

While traditional options like term life insurance exist, index universal life insurance offers unique advantages for business succession planning. Here are some key benefits to consider:

Financial Protection

• Guaranteed Death Benefit: Provides your beneficiaries with a lump sum regardless of market performance, ensuring smooth business transitions or debt payments.
• Cash Value Growth Potential: The cash value linked to stock indexes offers the chance for tax-advantaged growth, potentially exceeding inflation and creating additional funds for succession needs.
• Flexibility: You can control premium payments and adjust the allocation between the guaranteed and indexed portions based on market conditions and business needs.

Tax Advantages

• Tax-Deferred Growth: The cash value inside the policy grows tax-deferred, maximising investment potential.
• Tax-Free Withdrawals: Access a portion of the cash value tax-free for emergencies or unexpected expenses without impacting the death benefit.
• Potential Estate Tax Reduction: Properly structured policies can help reduce estate taxes for your beneficiaries. 

Strategic Funding

• Buy-Sell Agreement Funding: The death benefit can fund a buy-sell agreement, ensuring remaining partners can purchase deceased owners' shares and maintain business continuity.
• Liquidity Provision: Cash value access can provide needed liquidity for the business to cover expenses or debts during ownership transition.
• Succession Planning Flexibility: The flexible nature of IUL allows you to adapt your plan as your business and family situations evolve.

Retirement Planning

• ‍Retirement Income: IUL provides a cash value which can be used to deliver an income to a retired executive.

Key Man insurance works by:

1. Identify Your Key Person(s)

• Carefully assess your business to determine which individuals are crucial. Consider their roles, skills, knowledge, client relationships, and the impact their absence would have on revenue and operations.
  

2. Assess the Financial Need

• Calculate the potential financial losses stemming from the key person's death or critical illness.

Consider:

• Lost revenue
• Recruitment and training costs for a replacement
• Debt repayment
• Decreased business value

3. Choose an Insurance Provider

• Independent Financial Advisor (IFA): IFAs offer unbiased advice, comparing policies from multiple providers to find the best fit for your business.
• Insurance Broker: Brokers have access to various insurers and can assist with finding suitable policies.
• Directly From an Insurer: While possible, it may restrict your options.

4. Obtain Quotes

• Provide information about the key person (age, health, job), desired coverage amount, and policy term to get quotes from different providers.
• Compare coverage, premiums, included critical illness riders, and company ratings.
  

5. Application Process

• Complete an application form, providing the key person's information.
• Key person's medical underwriting: This might involve a medical exam and review of medical records.
• Insurer's assessment: The insurer analyses the risk and approves the policy.
  

6. Policy Setup

• Choose the premium payment plan.
• Nominate the business as the beneficiary.
• Review the policy terms and conditions carefully before signing.

Important Considerations

• Review and Update: Periodically review the policy to ensure the coverage aligns with your business's evolving needs.
• Consent: It's essential to obtain the key person's informed consent before taking out a policy on their life.
• Tax Advice: Consider discussing the policy with an accountant or tax advisor to understand any potential tax implications.
• Take legal advice in order to arrange the legal documents needed to hold the key person policy for the benefit of the company and to document the terms of the pay-out in planning like buy-sell agreeements.