Filed Under:Life Insurance, Life Settlements

Life settlements: Solutions for changing business needs

The selling or buying of a business or a significant change in key personnel can be profitable occasions to consider life settlements.

After such a major event for a business, life insurance policies on executives and other key personnel often no longer serve the function for which they originally were purchased. This can make the reinvestment of a life settlement a wiser financial course than maintaining the insurance would have been. Despite reports of a weak market for life settlements, a number of factors, such as the increasing longevity of seniors, favor finding the best life settlement deal sooner rather than later.

When ownership changes

A change in the ownership of a company or business division usually signals a significant change in the focus or direction of the business, which in turn implies a different set of key roles for the enterprise. Often, the skills of the key personnel who brought the previous entity to its current level are not necessary for the anticipated business strategy. New ownership buys out their contracts, and they find new opportunities. Sometimes, however, new ownership overlooks the life insurance policies they had taken out on the (formerly) key personnel or fails to realize the investment opportunity such policies present.

Maintaining such policies usually is an ill-advised investment strategy, as the value the former key personnel had for the previous business entity is no longer present in the new entity. To thrive in today’s business climate, an enterprise must leverage all the value it can from its assets. Life settlements can provide a business’s new ownership with a cash resource that can be invested with a much higher expected return than the key personnel life insurance policies they now have. New ownership can use this cash to purchase or upgrade capital equipment, recruit new key personnel or expand operations.

When a key person leaves

Many businesses also take out policies on the business owner’s life. Typically, such policies are structured to fund a buyout in the event of the owner’s death. If the owner decides to retire from the business, however, the buyout would take place before the death, obviating the need for the policy. In such a case, it would be in the company’s interest to pursue a life settlement and invest the proceeds more productively.

Sometimes, circumstances dictate that insurance is still necessary, but at a reduced level. Consider a situation in which the owner of a business cashes out, and the business had been maintaining a $5 million term insurance policy for him. He would still like a substantial amount of coverage to benefit his heirs, but he cannot afford the premiums necessary to keep the full $5 million in coverage and, for other reasons, may be unable to take out a new policy. So he decides to split the term policy, keeping $1 million in coverage and selling the balance for several hundred thousand, which allows him to afford the coverage he wanted and supplement his retirement resources.

Executive benefit packages funded by life insurance, such as split-dollar plans or deferred compensation, can unravel when the executive or owner leaves the company. While particular circumstances can rationalize the retaining of the policies for use after the death of the executive to reimburse the company for its payments, changes in tax laws since a policy was issued sometimes make a life settlement the wiser choice. This is frequently the case in split-dollar plans.

One way a change of ownership can open an opportunity for a life settlement is in the case of a policy that was set up to fund a buyout in the event of the owner’s death. Once the former owner separates from the business, a life settlement could easily be the means to fund a better-performing investment. Another example would involve a business selling off a division that employs one or more key persons. If the business had taken out key person policies on them, those policies would no longer be protecting the business’s interest, and again, a life settlement could be used to fund a more productive investment.

When business doesn’t boom

It can also occur that a severe downturn in a business could be the impetus to seek a life settlement. Consider a situation such as a publicly held company being forced into reorganization as a result of a bankruptcy filing, possibly brought on by unforeseen changes in market conditions.

The founder and major stockholder in the company finds not only that his stock in the company is now practically without value, but also that he has been forced out of office as CEO. In better days, the company had paid him bonuses in the form of what became a multimillion-dollar life insurance policy, but now he neither needs nor wants such an extensive amount of coverage. He’s instead more interested in continuing to live the lifestyle he had been living.

In such a situation, he could perhaps realize more than twice the cash surrender value of the policy through a life settlement, which could possibly bring several million dollars.

Competitive advantage

To remain competitive in today’s markets, businesses need to leverage their capital more intelligently than ever. Similarly, individuals need to educate themselves about the financial options available to them and be able to evaluate which of those options does the most to further the individual’s financial goals. Life settlements are one option that businesses and individuals alike cannot afford to ignore.

While some analysts have reported that the market for life settlements is relatively anemic, the particular factors of individual cases can sometimes neutralize the effect of weak market. One such factor is the increasing number of healthy and active years seniors are enjoying today. For those considering a life settlement, the possibility of enjoying an active life during one’s later years argues in favor of finding the best deal sooner, rather than waiting for an uncertain market to improve. Life settlements can be a very effective means to realizing the liquidity your business client needs to make necessary investments or maintain a comfortable lifestyle.

 

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Nichole Morford

Nichole Morford
Managing Editor

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