LIFE SETTLEMENTS FOR BUSINESS OR "KEY MAN" INSURANCE
A Life Settlement is fairly a new concept. It is considered to be a non-mainstream process of selling one's life insurance policy to another party and getting paid for it in an amount that's more than its cash surrender value. Senior citizens, who are restructuring their estate planning or are merely finding it hard to pay the policy premiums due to rising health costs and other financial reasons, are the most common sellers of life insurance policies.
However, Life Settlements are not merely for personal uses alone. Large businesses and companies have a big use for Life Settlements as well. Companies normally insure the key executives of their organization, also known as "Keyman Insurance", such that if anything unfortunate happens to them, like getting involved in an accident, or if they die while still holding their position, the company collects the death benefit to offset financial strains following the loss. Keyman insurance can amount to millions in policy face amount and premiums paid by the business.
There are two most common scenarios wherein companies may opt to discontinue the life insurance policies they own. First, if the insured executive or "keyman" may retire or leave the company for any reason, the business would normally return the policy to the insurance company for the cash surrender value. Second, should the business be sold to another company or go into bankruptcy it may make sense to discontinue the pre-existing keyman insurance policies. In this case again, the business would return the policy to the insurance company for the cash surrender value.
Should a business wishe to discontinue their current inforce keyman insurance policies it is generally to their advantage to enter into a life settlement transaction to liquidate the policies. By selling the policies on the secondary market for life insurance the business is ensured to receive the fair market value of the policies which generally is much higher than the cash surrender value offered by the insurance company.
For example; Company A currently owns a $10 million life insurance policy on the life of their CEO (Chief Executive Officer), as the sudden death or long term disability of the CEO would harm the business. Company A has owned this policy for 7 years and paid a total of $900,000 in premiums into the policy. Should the CEO decide to retire or take a new job elsewhere, Company A no longer has a need for the $10 million policy. If Company A decides to return the policy to the insurance company they will receive $150,000 in cash surrender value.
Instead by taking the policy to a Life Settlement Broker, Company A should receive the fair market value of the policy. The Broker collects all the information needed and receives bids from the providers who buy life insurance policies. Given that the average offer for a policy in a life settlement is 20% of the face amount, Company A can expect to receive $2 million for the keyman insurance policy they no longer need. In this case Company A has actually made a profit from the sale since they only paid a total of $900,000 for the policy yet received nearly $2 million in the sale.
Life settlements provide a viable alternative for companies owning insurance policies that they don't have any use for. This option provides them with additional funds above the cash value, but more importantly, the comfort of knowing that they can recoup the premiums paid into the policy.
In short, any company that owns life insurance on any employee should always consider a exploring a life settlement to maximize the return on an unneeded policy in order to recoup cost and make a profit.