Life settlements are frequently viewed, primarily, as an option for personal life insurance and estate planning policies that are no longer wanted, needed or affordable. However, business-owned policies or personally owned business purpose policies can also make excellent life settlement candidates, yet these policies are often overlooked.
When a business owner leaves, whether due to retirement, disability or the sale or liquidation of the business, advisors should be alert to the possibility of a life settlement. Quite often, the business will own or be paying for any number of policies on the life of the departing owner.
Life insurance policies are purchased by businesses for a variety of reasons: to fund a buy-out of the owner’s interest under a stock redemption arrangement, for key person purposes to offset the financial loss that would have been sustained by the business had this person died prematurely, or for creditor protection purposes to secure loans that may have been made by the business. In some instances, policies are not owned by the business itself but rather by co-owners of the business to fund a cross-purchase arrangement.
Although sometimes the exiting business owner will have a use for some of the coverage, a significant portion of the insurance may no longer be needed, wanted or affordable. A very large percentage of policies bought for buy-sell arrangements and key person needs are term insurance. So in addition to having a decreased need for coverage, the rising cost of the term insurance may be quite unappealing, if not altogether unaffordable, especially for an aging retired business owner.
Term insurance, that is convertible to universal life, can be an excellent prospect for a life settlement. Yet producers often overlook these policies under the mistaken belief that term insurance cannot be sold in a life settlement.