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How a Life Settlement Can Help Your Business Clients

January 25,17 | 10:10 pm


Life settlements can be of huge help to seniors who are struggling to pay their life insurance premiums or need to cover the costs of long-term care. Indeed, these are the people whom the life settlement market most often serves.

However, it’s not just individuals who can benefit from selling their life insurance on the secondary market. Businesses that carry key person insurance can also take advantage of life settlements in certain situations. In fact, a life settlement can sometimes help cover the costs associated with a transition or succession plan.

Take a look at these scenarios to learn more about when and how a life settlement might be appropriate for your business clients.

One important thing to note is that a business’s life insurance policies are subject to the same criteria as individual policies when it comes to qualifying for a life settlement solution. It’s important to check with an experienced life settlement broker, who can give you a good idea if the policy might qualify, before spending much time pursuing this option. 

Key person retires

If the key person who is insured decides to retire, there’s almost never any need to maintain life insurance on that person.

In a case like this, the life insurance might be cashed out, which often means that the company takes a loss on the premiums it’s already paid – and those are typically expensive.

However, another option is to sell the policy as a life settlement. If the company goes through an experienced life settlement broker, who can get multiple bids on the policy from investors, the company may get up to 800 percent more than the cash surrender value. That lump sum payment can then be used for anything related to the business – including, for example, funding the retiring person’s retirement package.

The company grows, resulting in the key person becoming less vital to the organization

Businesses grow and change, and when this happens, the key person often moves to a somewhat less vital position.

Consider a family-owned business. It’s quite common for family businesses to take out life insurance policies on the owners, as the death of that person could potentially wipe out the one source of his or her family’s income. If a tragedy like that were to occur, the benefit from the life insurance could at least give other family members some time to decide how to move forward with the business.

But what if the business expands, adding non-family employees or executives who are just as capable of keeping the company afloat?

In this case, the owners might decide that it makes more financial sense to sell the policy as a life settlement. This not only lets the company dump the costly annual premiums, but also opens up a source of cash that can be used for other purposes.

Key person sells stock in the company

If a key person sells or otherwise relinquishes his or her stock or share in the company, there may be no need to continue to insure that person. Rather than take the loss of the cost of the premiums and accept the cash surrender value, the business could sell the policy as a life settlement to recoup some of those costs.

Another potential scenario, however, is funding a buyout of the key person’s shares. If a company wants to buy that person out, but lacks the liquid funds, the lump sum payout from a life settlement could be used to fund the process.

Life settlements have several uses for businesses that have key person insurance that they no longer need to maintain. To find out more about how life settlements can work for businesses, read our post “How a Life Settlement Can Help Businesses and Nonprofits.”

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