Selling a business is often one of the most significant financial milestones in a client’s life.
Financial advisors help business owners navigate the transition, manage the proceeds, and prepare for their next chapter. But one asset can easily be overlooked during the process: life insurance.
A policy originally purchased to protect a business, fund a buy-sell agreement, or support succession planning may no longer serve the same purpose after ownership changes.
At Abacus Life Solutions, we believe business transitions create an important opportunity to revisit existing coverage and evaluate whether a life settlement may be worth considering.
Why Business Owners Purchase Life Insurance
Life insurance can play several important roles in business planning.
Business owners may purchase coverage to:
- Fund buy-sell agreements: Provide liquidity to facilitate the transfer of ownership following an owner’s death.
- Protect against the loss of key employees: Help a business manage the financial impact of losing an important executive or employee.
- Support succession planning: Provide financial resources to help facilitate a business transition.
- Address estate planning needs: Help beneficiaries manage financial obligations associated with an owner’s estate.
These policies can serve an important purpose while the business is operating. But when ownership changes, the need for that coverage may change as well.
What Changes After a Business Is Sold?
Once a business is sold, the original purpose of certain life insurance policies may no longer exist.
For example, a former business owner may no longer need coverage tied to a buy-sell agreement. A key-person policy may also become unnecessary if the insured individual is no longer involved in the business.
Meanwhile, premiums may continue even though the policy no longer supports the owner’s current financial goals.
This creates an opportunity for advisors to ask:
- Why was the policy originally purchased?
- Who currently owns the policy?
- Does the original need for coverage still exist?
- Are ongoing premiums still justified?
- Could the policy have value in the secondary market?
The answers can help determine whether keeping, modifying, or selling the policy makes sense.
Could a Life Settlement Be an Option?
When a policy is no longer needed, surrendering it or allowing it to lapse may seem like the most straightforward solution.
However, eligible policies may qualify for a life settlement.
A life settlement allows a policyholder to sell an existing life insurance policy to a third party in exchange for a lump-sum payment. The buyer assumes responsibility for future premiums and receives the death benefit when the insured passes away.
For qualifying policies, the proceeds may exceed the policy’s cash surrender value while eliminating future premium obligations.
For business-owned policies, advisors should first confirm ownership, contractual restrictions, and who is authorized to make decisions about the coverage. A business sale does not automatically transfer a policy to the former owner.
Turning an Old Business Asset Into New Opportunities
For former business owners, selling a company often marks the beginning of a new financial chapter.
If an existing life insurance policy is no longer necessary, proceeds from a potential life settlement could support priorities such as:
- Retirement income and financial flexibility
- New investments or business ventures
- Estate and legacy planning
- Family or charitable goals
- Healthcare and other future expenses
Rather than continuing to maintain coverage that no longer serves its original purpose, eligible policyholders may have an opportunity to redirect its value toward their current financial objectives.
Make Life Insurance Part of the Business Exit Conversation
Selling a business involves more than transferring ownership and managing the proceeds.
It is also an opportunity to review the financial strategies and assets that supported the business over the years.
For advisors working with business owners, reviewing existing life insurance can help identify policies that still serve an important purpose and those that may deserve a different strategy.
Before an unneeded policy is surrendered or allowed to lapse, consider whether it could have value in the secondary market.
Discover What Your Client’s Policy Could Be Worth
If your client has recently sold a business or is preparing for a business transition, an existing life insurance policy may deserve another look.
