How A Life Settlement Can Help Resolve Key Man Insurance Issues

Key man insurance is often a common strategy to protect the interests of a business, particularly a small business that could be in peril if its founder, president or other key employee passes away suddenly. But what options do a company or retiring key employee have when that policy is no longer necessary? In some cases, a life settlement can provide a resolution that is much preferable to a policy surrender.

One key consideration for a company weighing its options regarding key person insurance is the reason for the employee’s departure. If a key employee leaves for another opportunity while he or she is still relatively young, the business will be better off surrendering the policy. But the situation is markedly different when a key man or woman retires because of advancing age or health issues. Particularly if that person is in poor health, a life settlement might be the best way for the company to recoup some of the costs it paid out in premiums over the years.

Often a company will offer to sign the insurance policy over to the departing employee as part of retirement package. That individual’s decision to accept or decline the policy will be contingent on the costs of the premiums and the level of life insurance that person already carries. The retiring employee might inherit the policy, then opt to investigate a life settlement, or if the company is left holding the policy it can also pursue a sale to a settlement provider.

Another circumstance that could spur the possibility of a life settlement for key man insurance is a significant change in a company, such as a sale or a merger, that shifts that person’s role and makes them less vital to the company’s success. In a cost-benefit analysis, the business leaders might decide that the expense of the premiums is no longer necessary compared to the potential effects of losing that employee.

Several variables dictate whether a settlement is a more profitable option for an unneeded life insurance policy, most notably the health of the insured and the original price structure of the policy. A company holding key person insurance on an employee who no longer works there needs a path of action to get some equity out of the policy, and a life settlement could have a considerably higher yield than a surrender. To determine whether your key man insurance policy is a good fit for a life settlement, consult Magna’s life settlement calculator today.

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