As the baby boomer generation steps into retirement, a treasure trove of business-owned life insurance policies is making its way to the life settlement market. This shift isn’t just a trend—it’s a golden opportunity for estate planners and financial advisors to unlock substantial hidden value for clients and revolutionize their approach to life insurance as a business asset.
Consider this startling fact: 88% of life insurance policies never result in a death claim. Even more startling, more than $120 billion of death benefit is lapsed or surrendered on senior insureds each year, many of which were purchased to protect a business. These statistics stress a massive opportunity and the critical need for strategic alternatives like life settlements.
Many businesses hold substantial life insurance portfolios, policies originally acquired for key-person protection, buy-sell agreements, or employee benefits. As retirement approaches or businesses change hands, these policies often become obsolete. Rather than allowing these valuable assets to lapse or be surrendered for minimal value, life settlements offer a potentially lucrative alternative that aligns with prudent financial planning.
A Life Settlement for Business-Owned Policies in Action
A compelling case illustrates this potential. A 77-year-old business owner held a $2,150,000 life insurance policy, originally part of a buy/sell agreement. After selling the company to his children, the policy became unnecessary and maintaining it would have been a financial burden for the new owners. Given the insured’s below-average health and the policy’s efficient premium, it was an excellent candidate for a life settlement. Instead of surrendering the policy for a fraction of his basis, the business owner sold it for $745,000—almost $700,000 more than the surrender value. This newfound liquidity provided much-needed financial stability during the transition, ensuring a smoother and more secure transfer of the business to the next generation.
Common Situations for Business Owners to Benefit from Selling a Policy
Business owners purchase life insurance to protect their families, companies, and employees from debts and unexpected costs if an owner or key employee passes away. However, over time, policies can become unwanted, unneeded, or unaffordable. Selling these policies can be beneficial in various situations:
- Key Employee Retirement: The need for key-person insurance diminishes when the insured retires.
- Business Sale: Policies used for buy-sell agreements or business continuity may no longer be needed after a sale.
- Generational Transition: The hidden value may provide crucial liquidity required for transitioning ownership, strengthening a balance sheet, or funding a revised agreement for next generation owners.
- Need for Liquidity: Immediate funds may be needed for various strategic purposes, including paying down debt or reinvesting in the business.
- Loan Repayment: Once a loan is repaid, the policy may no longer be necessary.
Life settlements typically yield six times more value than surrendering policies, resulting in billions of dollars that can be reallocated to pressing needs, strengthen balance sheets, or enhance retirement strategies. With over 12 million privately owned businesses expected to change hands in the coming decade, the life settlement market presents an unprecedented opportunity to uncover “found money.“
SCOTUS Connelly Ruling Shakes Up Business-Owned Life Insurance
The recent Supreme Court decision in Connelly v. United States has signaled a transformative change for corporate-owned life insurance (COLI,) with far-reaching implications for the industry. This landmark ruling, which includes life insurance proceeds in the valuation of closely held businesses for estate tax purposes, underscores the critical need to review and update buy-sell agreements and their funding mechanisms. This proactive approach is essential for minimizing estate tax liabilities and ensuring optimal tax efficiency, but also identifying business-owned policies that no longer satisfy their initial planning needs. Decisions will be made as a result of these reviews to lapse or surrender policies that no longer address their original purpose or have become unaffordable. Guiding clients towards appropriate exit strategies, including life settlements, will serve their best interest.
Navigating the Life Settlement Process
Navigating the life settlement process requires strategic guidance from an expert. A thorough policy appraisal process should be undertaken, which takes into consideration the insured’s health and ongoing treatment, policy dynamics, costs and efficiency, carrier strength and numerous other factors. While selling a policy may seem straightforward, it can be a complex transaction. Collaborating with an authority who has extensive fund relationships, market and product knowledge, and can consistently secure the best offer is essential.
Integrating the right life settlement expert into your team brings independence, professionalism and service excellence to the forefront. These specialists provide access to broad market insights and advanced case assessment processes, positioning them as essential advocates. Their involvement ensures that all aspects of the transaction are handled with transparency and precision, allowing advisors to offer tailored solutions that meet current financial priorities and future initiatives. This collaboration not only unlocks the hidden value in life insurance policies but also solidifies the advisor-client relationship.
Strengthening Client Relationships and Increasing Referrals
The impending transfer of over $68 trillion from baby boomers to their children represents the largest wealth transfer in history. This seismic shift impacts the business succession landscape presenting a golden opportunity for financial advisors to demonstrate expertise, deepen client relationships, and grow their practices.
Proactively addressing life settlements can significantly enhance client relationships and expand your practice. Regular life insurance reviews create opportunities to discuss evolving needs and position you as a go-to resource for critical decisions. Sharing these innovative concepts with your referral network can lead to new opportunities and solidify your role as a valuable advisor. According to a MassMutual survey, 86% of business owners value professionals who can address both personal and business planning needs. By integrating life settlements into your suite of solutions and offering, you’re perfectly positioned to meet this demand.
Treating Business-Owned Life Insurance as a Real Asset
Life insurance is an asset like real estate, securities, equipment, or business software. However, unlike other assets in your client’s portfolio it is more complex to identify its true value, and too frequently it is not reviewed. By embracing life settlements as a powerful tool in business and estate planning, advisors can expertly guide clients through this complex terrain, safeguarding legacies and offering invaluable strategic foresight. In an increasingly complex financial world, the ability to unlock hidden value in life insurance will set exceptional advisors apart, ensuring their clients’ business and estate planning needs are met with care and innovation. For deeper context, see our perspective on life settlement estate planning and how to work with a life settlement broker vs direct buyer to maximize the outcome.
