When a key employee is terminated, the key person life insurance policy typically either lapses, is transferred to the employer, or continues under new terms, depending on the contract and who owns the policy.
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Ownership determines the outcome
If the employer owns the policy, they retain the coverage and can choose to keep it, rename the insured, or cancel it. The premium payments stop if the employer decides to cancel, and any cash value may be retained by the company.
Employee‑owned policies
When the employee owns the policy, termination ends the employer's ability to pay premiums. The employee can keep the policy by paying premiums themselves, or they may let it lapse. Some policies allow conversion to an individual policy without evidence of insurability.
Impact on beneficiaries
Beneficiary designations remain unless changed. If the policy is cancelled, no death benefit will be paid, and any accrued cash value is usually paid to the policy owner.
Legal and contractual considerations
Employment agreements or key person clauses often specify the handling of the policy upon termination. Review the contract to understand obligations, such as required notice periods or premium reimbursement.
Options for the employer
- Maintain the policy for business continuity.
- Transfer ownership to another key employee.
- Cancel and recover any cash surrender value.
Options for the former employee
- Convert to a personal policy if allowed.
- Continue paying premiums independently.
- Allow the policy to lapse and seek alternative coverage.