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Insurance Advisors Prime Spot to Assist with Business Succession Planning

By August 11, 2015April 9th, 2019No Comments

Insurance Advisors with Life Settlement Expertise in Prime Spot to Assist with Business Succession Planning

According to the results of an FPA/CNBC survey of planning professionals released in April 2015, 78 percent of small business owners expect to sell their businesses to fund their retirement. But what’s even more remarkable about the survey is the fact that more than 70 percent of small business owners have failed to create a written succession plan.

The lack of proactive succession planning by aging business owners who are on the threshold of retirement becomes even more concerning when considering statistics published by the California Association of Business Brokers. According to CABB’s website, retiring business owners will sell or bequeath $10 trillion worth of assets over the next two decades. These assets are held in more than 12 million privately owned businesses, with more than 70 percent of these companies expecting to change hands.

While many small business owners may be lagging behind when it comes to developing a written succession plan, at some point the need-to-plan light bulb will go on, and the flood gates will open. This, in turn, will create a demand for a variety of professionals with specific areas of expertise – including business brokers, estate attorneys, CPAs, financial planners, and insurance advisors.

So what does all this mean for insurance advisors – especially those with life settlement expertise?

Rather than wait around for business owners to engage in “crisis planning,” insurance professionals can get ahead of the curve by calling on aging business owners and suggesting that they start now to create an exit plan. Begin the conversation by asking them what they plan to do with the key person life insurance policy owned by the business.

When small businesses have more than one owner, it is common practice to have in place a buy-sell agreement that will allow a retiring owner, or a deceased owner’s estate, to receive fair value for his or her ownership share. This agreement is often funded by key person life insurance policies on each owner that will allow the policy proceeds to be used to buy out a deceased owner’s share without forcing the liquidation of the business.

As part of the discussion about key person insurance policies, insurance advisors will want to explain the various options as it relates to the disposition of any corporate-owned life insurance that will likely become obsolete once the owner retires. Depending on the client’s age, health, and the type of policy, the retiring business owner might qualify for a life settlement which is often a preferable alternative to allowing the policy to lapse, or accepting a low surrender value.

Life settlements for key person life insurance policies could be used as leverage in a variety of ways: (1) to purchase a more cost effective policy for the retiring executive; (2) to eliminate company debt; (3) to free up funds for capital investment; (4) to serve as a point of negotiation relating to the sale of the business; (5) to enhance a severance package; (6) or to provide a cash windfall for the retiring executive to use for lifestyle enhancement.

If you have questions regarding life settlements, contact us at Abacus 615-732-6241.

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