Gray Sheeting and a Key Person Policy

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What You Need to Know

  • Companies buy key person insurance to protect themselves against the loss of critical personnel.
  • When a key person leaves, the company-policyholder might simply dump the life insurance policy.
  • An appraisal could help the company-policyholder extract more value from the policy.

The life insurance settlement industry’s latest phenomenon of “gray sheeting” appears to also be affecting key person policies sold on the secondary market.

Corporate clients may get much higher prices than they expect if they get a key person policy appraised before trying to sell it.

1. Key Person Life Insurance Basics

Key person life insurance, also known as “key man” insurance, presents great opportunities for advisors and agents.

Companies use key person insurance to protect themselves against the loss of the most important executives.

When an agent is working with a corporate client, they often have an opportunity to sell one or more key person policies for executives within a company — multiple sales for about the same amount of work as for a single sale.

Key person insurance is most frequently bought to protect partners in a business if one of them dies. It can also be used to fund a buy-sell agreement.

A key person policy is an extremely strategic product when implemented correctly. It’s typically great for agents and advisors, because premium payments are funded through the business as a regular expense.

The policies are part of the operating costs of the business and rarely get canceled.

2. When the Key Person Stops Being Key

If an insured executive leaves the company that bought the key person policy, the equation changes.


The policy, which was purchased by the company to protect the business, is no longer needed, and in most cases, it is terminated.

This is where most organizations miss a potential opportunity to turn a liability into an asset.

The company can work with an executive who leaves us and potentially performs a life insurance settlement and determines how to divide the proceeds.

Or the employee can take ownership of the policy as part of the exit and then perform a life settlement — and pocket all of the profit.

3. Key Person Policies and the Life Settlement Market

Within the life insurance industry, key person policies are significant, but they are not traditionally a large part of the life settlement business — which is why they might fall victim to gray sheeting.

Agents or advisors who may be selling a key person policy may not be familiar with all the details of the industry.

Some might be selling a policy on the secondary market for the first time.

4. Gray Sheeting

Gray sheeting gets its name from the gray-haired seniors who are the industry’s typical clients but also because the companies that use gray sheeting practices are operating in a gray area of ​​the life settlement market.

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