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Life Health > Life Insurance

4 Succession Planning Questions for High-End Life Insurance Clients

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If you advise business owners on high-end life insurance, planning for what will happen with that policy when the owner retires is just as important as establishing the policy

(Related: Estate Planning Is Still Important)

As a good steward of your client’s resources, you can and should try to make sure your client is receiving competent, effective advice about transition planning — especially as it pertains to their high-end life insurance.

Many business owners know, in theory, that they should make these decisions and talk to their financial advisor long before they retire, but a large majority fail to put a plan in place before it’s too late.

Here are four critical questions to consider when you’re helping a client make this big life decision. The concerns range from whether clients need life insurance in retirement to what kind of buy-sell life insurance should be in place.

1. What happens to business owners’ own high end life insurance when they retire?

The fate of a business owner’s high-end life insurance during retirement or a transition to new ownership is usually determined by the type of insurance held at the time of the transition and depends on the flexibility of that insurance. If a business owner plans far enough in advance, they can ensure their life insurance supports both the viability of their business and their own well-being in the next stage of life.

2. What type of policy is it, and who owns it?

Understanding who owns the policy and what kind of policy it is will help you decide if a change needs to be made prior to the transition.

Often, a permanent life insurance policy is more beneficial than term life insurance. Once a permanent insurance policy is paid for, it will be in place until death. The permanent insurance will also lend itself to more options once a successor is put in place, ultimately holding more value for the business owner and the business overall. Alternately, a term insurance policy will only last until the term is complete, necessitating the potential need to revisit the insurance plan and cost. If the term insurance contains a convertibility provision, this should be considered, particularly if the insurability of the owner is in question.

If there is more than one business owner, it’s essential that each owner is covered by a policy. If the business has already been sold, the new owner should immediately explore the owner’s own options with financial and life insurance advisors.

3. Does your client need life insurance in retirement?

The decision of whether to retain life insurance in retirement is typically cost-driven, as advisors are aware. If the business is transitioned to new owners, the incoming owner may opt to buy the retiring owner out of the current insurance plan.

In the case of a sole business owner, the appropriate amount of insurance in retirement will be determined based on the viability of continuing the insurance. For example, if the business owner has a million-dollar life insurance policy prior to selling their business, they may not need such a policy anymore. Factors impacting the decision will include individual circumstances, like the owner’s dependents and personal investments, as well as the ability to fund a policy during retirement.

If there are multiple owners in the business, those shareholders or partners should decide if the business will retain the policy for the retired owner. If life insurance is already in place, it may be appropriate for the business to continue to own the insurance and retain the policy as a business asset. If the retired owner passes away, the business life insurance plan will need to be restructured. As an alternate option, the policy can be assigned to the retired owner/insured, removing the business’ vested interest in the policy.

4. What kind of buy-sell life insurance should be in place?

Buy-sell agreements are used as a blueprint in the event of a buyout, disagreement, sale, divorce or death of an owner. Life insurance is often used to fund buy-sell agreements, making adequate life insurance an essential element of any transition plan. Options include term life insurance, allowing business owners a cost-effective way to secure coverage, or permanent cash value life insurance, which offers owners liquidity, cash growth and guaranteed death benefits. Clients should work with a dedicated team of advisors to determine which option is best suited for their transition plan.

The process of securing and retaining high end life insurance is a critical part of the overall succession planning process. It’s important to ensure clients have a plan in place early, and ask the right questions, to get the help they need prior to taking the next big step.

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Jason Baum (Photo: Rehmann) Jason Baum, CFP, is a financial advisor with Rehmann Wealth Management. He is based in Naples, Florida.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.