Should I buy out key man insurance when I leave my company?
[social_share]Key man insurance is the policy a company will buy on the lives of its most indispensable employees, intended to payout to the company rather than the employee’s family. The reason for this life insurance is that, in many companies and particularly smaller ones, there is often a reliance on several people to either keep an important client happy, run a vital part of the business, or build or maintain a crucial product. If one of these employees were to die, the company would likely suffer a great financial loss in the short term, and so these insurance policies are there to ensure the company’s survival during that upheaval.
Sometimes key man insurance is known as “dead peasant insurance,” as the company is seen to be treating its employees as high-handed lords might treat peasants who simply need to be kept working. However, as discussed there is a perfectly valid business reason for this insurance.
When such an employee decides to leave the company, there is the question of how to handle the key man insurance. There will often be some years remaining to the policy’s term, but now the company no longer has any reason to continue paying the premiums, apart from perhaps an investment reason. In many cases if the company were to cease payments, it would simply forfeit the policy, although if the end of the term is approaching the company may be able to surrender the policy to the insurance provider in return for some money. Another alternative is to perhaps sell the policy to an investor who will be named the beneficiary and continue paying the premiums.
However, in some cases the former employer will offer the departing employee the option to buy out the key man insurance policy. This will often be at a good price as the policy will usually have had some time to run and therefore has some market value. As well, the former employee who is buying the policy will assign more value to it than a third party investor, as the employee’s family can now be covered by the policy.
These life insurance policies can be good value, although it is always a good idea to compare the price with comparable insurance policies prior to closing the deal.
