Our first article for the year concerns keyman insurance.
Now, suppress that yawn and hold your attention a moment, because my enlightening story is slightly macabre.
There, gotcha now.
Insurance is engaging if you present it correctly. Keyman insurance – there’s a slim bit of what some may term sexism in there, I’m afraid, yet my fretting has left me bereft of a replacement. Latin grammar’s to blame, ‘he’ standing for ‘we’, and there’s no one alive to confront. If I come up with an alternate, I’ll employ it.
Let’s comfort ourselves: the term is all-inclusive today and the insurance coverage universally applicable and invaluable.
How do we value a key executive? The commonest technique involves multiples of income: take the vital manager’s salary and benefits, multiply by five, and buy that amount in life insurance. You want to cover replacement costs: the price of hiring, training and paying a capable alternate. Contributions to earnings is another technique: simple to calculate for sales personnel, hard to work out for top-floor personnel.
In private equity deals, insurance for key leaders (there, I found it!) is universally required because they’re deemed crucial for project success. In the general financial world, insurance must cover replacement, as noted, and perhaps debts outstanding – a top leader dies, the firm may go down. Remember that spouses and children could be next in line for ownership, with leadership in their minds, once they inherit the late partner’s shares. This can go badly and the key leader policy payout can buy out that stock; be sure to include a mandatory provision in the company’s founding docs. SOP, if you’re smart.
My Uncle Don could explain, if they had Wi-Fi in the Pearly Kingdom. In the 1970s, dirty old Boston needed a makeover. Old industrial turf became host to new projects, flashy residential towers, spiffy waterfront condos. Don and partner Larry got into the latter, with government fronting the cash. Each happy Monday, they’d pick up a check – fifty thousand – turn in their report on the previous week’s spending, wave goodbye ‘til next time. Keep straight records, and Boston covers your operating costs. Brilliant.
Don’s background was engineering, Larry’s was finance. Big L drove a Stingray Corvette, jet-black custom, and it made the wharf rumble. The secretaries were sunny and pretty – I was 16, they made an impression – and they ran the office. They had to: if you needed Don, check the worksite, they’d say – there he was, backing up the mixer, pouring concrete, shovel in hand. The boss gets to play, he said. Uncle should have been watching the books.
Flash Larry, mustachioed slick, was good with banks and investors. I liked the guy; he had time for a teenager; but those wet eyes – what was it? Too young to understand, to see it: the bottles, the mystery white powder, late hours and a slight guilty conscience. A lot of us are Catholic in Massachusetts; nothing new there, and yet…
Don and his partner worked in different times, yet they shared our eternal problem: some folks can’t die without compensation. A symbiotic pairing, mutually chained; if one went down, the other needed an out. Here comes the creepy: one did go down, and it couldn’t have happened to a nicer, more nefarious guy.
As a rule, classic Stingrays were painted Popsicle Orange. Larry, already partly sunny, wanted it raven: these ledge-walkers know, I suppose. One day, he was hurtling down I-6, just arriving at Plymouth, getting pumped for the turn to Cape Cod, when a truck dumped its load of logs, broad New England pine, onto the highway in front of his Ray. Spurring that glossy beauty, hurtling on unstoppable, way past the Gas Crisis-mandated 55 mph, he would’ve needed retro-rockets to stop in time. Ah, Larry, old pally, I remember you fondly, you no-good, till-dipping crook.
He’d been siphoning it off, a bit here and there, and it wasn’t so hard to cover, not at first. Where was the money? Up his nose, said Uncle Don the first time I heard that analogy. No understanding from the Boston State House: we want our money, uno minuto! Don collected the key fool’s death benefit, covered the debt, stoically saluted as his dream sank in the Atlantic. Then he took I-95 at a moderate pace down to Florida, where his boat was docked.
Don ran fishing charters for a living – no real estate deals for the tainted – but he’s smiling in photos, the family’s Dean Martin, so it was OK. He wasn’t pauperized; he kept his vessel and my-aunt-his-ex’s house, and life kept swinging. “He was worth the premiums,” Don said, about that crumby stiff Larry. I hope that’s what uncle had carved on his partner’s tombstone.
Our New Year’s advice is simple: insure your partners and vital personnel. The pandemic revealed that middle managers are worth protecting – they’re often in line to replace the key fallen, at least for the interim. If anything happens to a groomed successor, you’ll need resources to replace her; younger candidates are usually cheap to insure, too.
Key leader coverage is a type of term life insurance. Prices vary on the usual considerations like age and health, and a medical exam is standard. It’s conceptually simple: the company buys the policy and names itself the beneficiary. Coverage levels depend on your goals – replacement costs, perhaps one year’s operating expenses, and so on – and your insurance specialist knows all the right questions to help guide you to a relatively safe harbor.