You would think that if you have the money to pay for life insurance that you could buy any amount you might want. In fact, this was the case with a recent client I went to see with one of our local agents. He had received a call from an attorney client; they needed to buy coverage to fund a buy sell agreement they were putting in place for a business which housed a building the two of them owned together. They were 50/50 partners in the business and wanted to make sure the cash was on hand to buy out the heirs. Here is where the kicker is; they also wanted to just provide a bit of extra cash for their family members. After exchanging pleasantries, they stated they each wanted $1,000,000 of coverage for the building. I asked them what the value of the building was and how they came up with $1,000,000 each. The response was that the building was worth about $500,000 and they just thought $1,000,000 each would be a good amount to buy out the partner and give a bit extra to the heirs. I explained that the insurance company would only insure for the value of the building and any outstanding loan on the building, which was about $160,000. So the maximum insurance on each today to fund the Buy-Sell would be about $350,000 each. That is when I got the question, “You mean I can’t just buy any amount of life insurance I want?”
With the Buy-Sell agreement, as with any life insurance, there does have to be specific financial justification for the amount of insurance that is purchased. In the case of a Buy-Sell agreement, the carrier would want to see a formal business valuation done by an accredited appraiser or the value of the business found in the business’ financial statements. With Keyperson insurance, the carrier will typically cover up to 10 times the Keyperson’s total compensation.
In all cases a cover letter giving the underwriter important and relevant details that are not addressed in the application is very important in answering the potential underwriting questions. At a minimum the cover letter should include:
- Tell the business story – who they are, what they do, where they do it, how well they are received, any growth plans that they might have
- A clear business purpose that the life insurance will be used for
- Policy owner’s relationship to the insured, making sure there is a clear insurable interest
- How the requested insurance amount was determined
- Any insurance that is currently inforce and the purpose of that insurance
- In the case of Keyperson coverage, include a biography of that key employee
- Any additional supporting data you might have. You may even want to look online for details.
Here are some great cover letter templates you can use from Legal & General America (scroll down to Financial Underwriting Cover Letters).
Perhaps it would be great if the insurance companies just let us have whatever amount of life insurance we are wanting, but for now, life insurance carriers are focused on protecting your client’s wealth, not creating it!
Would you like to discuss a case or learn more about business life insurance? Feel free to give us a call.