What to Do with A Key Man Policy When the Key Man Leaves

(3 Minute Read)

Companies work hard to find and retain quality, irreplaceable talent. When you’re lucky enough to have found a rare gem in an employee, you might have taken out a Key Man life insurance policy on them. This is a smart way for companies to make sure they’re not losing too much if a key employee passes away. Of course, key man policies are only valuable if the key employee stays with the company.

The Changing Landscape of Key Man Policies

In year’s past, key man (or key employee) policies were more popular because most executives would remain with their companies throughout their entire careers. In today’s world, executives and top talent tend to move toward better offers and environments, making key man policies less popular. There’s less of a guarantee that a key man will stick it out for the long run.

What Companies Can Do When a Key Man Leaves

Andrea Trudeau, executive vice president and founding principal of ABD Insurance and Financial Services, says that companies who lose a key man to another company are best to simply accept the policy’s surrender value. However, older executives sometimes leave the workplace because of health issues. When a key man is forced into retirement due to a medical condition, companies look at their key man policies and wonder what they should do next.

Though the policy was intended to provide resources for finding an employee’s replacement if the company lost the key employee due to an unexpected death, when the employee suddenly retires, the policy loses that safeguard. It no longer makes sense to continue making premium payments on the policy, but simply surrendering the policy without exploring options might mean losing out of possible liquid funds. This is especially true if the policy meets the requirements for a life settlement (or viatical settlement).

How Life Settlements Work

Life settlements—sometimes referred to as ‘viatical settlements’—are the sale of a life insurance policy to a third party. The original policy holder relinquishes their right to the death benefit, but also the responsibility of keeping the policy active. Companies who lose an insured senior employee to unexpected early retirement might be stuck making premium payments on an unneeded policy, or face fees if they want to proceed with surrendering the policy. A life settlement (or viatical settlement) can provide the company with a greater cash reward than the policy’s surrender value. This helps to offset the financial burden the company faced to maintain the policy through its lifetime, while also providing additional resources to offset the loss of the employee.

To see if a key employee insurance policy qualifies for a life settlement, visit our Qualification Calculator today!

Case Study:
Ray retired due to health concerns. His company owned a key man policy on Ray. As part of Ray’s retirement package, the company gave Ray the convertible term life insurance policy. Ray needed money for medical expenses so he sold his convertible term policy for $165,000.

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