Insurance: The Forgotten Asset
One source of business capital that business owners often overlook is life insurance.
Business owners often look for additional capital in order to keep their businesses growing or afloat, and one source of capital they often miss is what is tied up in life insurance policies.
It’s rare for a business or individual business owner not to have purchased life insurance at one time or another. Life insurance is often acquired to fund a buy/sell agreement, provide additional equity in the event of a key employee’s death, provide additional dollars to back up a business succession plan or just to provide the capital necessary to pay estate taxes. All are good reasons to acquire life insurance, and you’ll never know just how important life insurance is until you need it.
Sometimes the insurance is owned by the business, other times it’s owned by the business owner. Sometimes the insurance is term with no cash value, and other times it’s cash-value-driven. Whichever type of insurance you or your company have, one thing is certain: There may come a time when the insurance you acquired is no longer needed.
Some reasons a person may decide to no longer carry his or her insurance are under-performing policies, the sale of the business, estate tax reform, the need for money to keep the family-owned business running, a weak economy or the beneficiary predeceases the insured.
Policy owners have three options for handling an unwanted policy:
1. Cash it in for its surrender value.
2. Stop paying the premium, in which case the policy will lapse. This makes sense if the cost of the insurance was greater than the potential return.
3. Arrange for a life settlement, which is the sale of a life insurance policy in exchange for cash in excess of the policy’s cash surrender value, even if none exists.
A life settlement is a unique wealth and estate planning tool that removes the burden of expensive insurance premiums and provides a lump-sum payment. It allows the owner to extract the maximum value from an existing life insurance policy and repurpose those funds for whatever financial need may exist.
When it comes to qualification for a life settlement, most funding groups focus on seniors older than age 70 or insured individuals of any age who have serious illnesses. Policies of $100,000 or greater, and cash-value or term policies qualify. These two examples illustrate typical payouts:
Male, age 72
$4,000,000 universal policy
Cash surrender: $538,000
Life settlement: $1,041,000
Male, age 69
$10,000,000 term policy
Cash surrender: $0
Life settlement: $1,460,000
Only you can determine if a life settlement is right for you, but keep in mind that, as a business owner, you do have options. The choices you make today can have profound economic repercussions on your future.
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