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Life Health > Life Insurance > Life Settlements

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 us leaving and potentially perform a life insurance settlement and determine 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.

Gray sheeting is a consequence of decades-old practices of brokers and provider companies failing to offer fair market value for a policy.

Brokers or other advisors fail to get a third-party appraisal and end up selling through an inefficient life settlement market.

Invariably, the policyholder and the agents lose out because the broker or provider doesn’t have the knowledge or experience to independently value the transaction or relationships with the most aggressive funds that will pay the highest price for the policy.

5. Where Appraisals Fit In

To combat this, an agent or advisor must have a true understanding of a key person policy’s value before they hand it over to a broker or provider.

Otherwise, they could get significantly lower offers than the true market value.

A policy appraisal gives the agent, the advisor and the policyholder the best chance to get an appropriate price for the policy.

Executives need to know that life insurance is an asset.

Just as a company wouldn’t sell a piece of equipment, land or inventory without an appraisal, it should not sell a life insurance policy without the same consideration.

Agents and advisors who can help their clients sell a key person policy on the secondary market often emerge as a hero because many corporate executives aren’t aware of the life settlement option.

It’s not every day that an agent helps a company move an expense item to the asset column — and then later turns it into pure profit.

The inefficient gray sheeting market that has emerged, however, can spoil the hero’s ascension.

A policy appraisal, in advance of selling a policy on the life settlement secondary market, will ensure that a key person policy is sold for the maximum value.

Wm. Scott Page (Photo: Scott Page is the founder of





(Image: Hvostik/Shutterstock)


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