Workplace

In the event you decide to sell your company and retire, your primary goal likely will be to extract maximum value from the business you've worked hard to build. However, many retiring business owners (as well as their legal, financial and business advisers) fail to recognize the enormous value hidden within one of their most overlooked and under-used business assets—life insurance policies.

Life settlements

Companies purchase life insurance policies for risk management, employee benefits and investment purposes. When a company is put up for sale, some of these policies may become obsolete because the reasons they were purchased no longer are relevant.

Historically, retiring business owners have faced limited disposition options when their changing needs have rendered their life insurance policies obsolete. These options include allowing a policy to lapse (thereby forfeiting the value of all premiums paid) or surrendering the policy to the original insurer for its cash surrender value (the amount of cash a policyholder receives in the event the policyholder terminates a life insurance policy before it becomes payable by death or maturity). This amount doesn't reflect a policy's true value.

The average cash surrender value of a life insurance policy is only 4 percent of its face value. However, a life settlement—the sale of a life insurance policy to an institutional investor for cash—provides an average payout of 20 to 25 percent of a policy's face value. This immediate cash can then be used to expedite a company's sale by providing the extra money needed to fill the gap between the selling price and buying offer.

Consider, for example, three partners who own a successful roofing company. Each partner owns two $3 million term policies on the lives of the other partners. Seeking to sell their firm, the partners receive no offers they believe are adequate for achieving their retirement and legacy goals. But their advisers, who are aware of the value hidden within these term life policies, suggest the partners coordinate the sale of their company with the sale of their life insurance policies to institutional investors for $600,000 each. After doing so, the partners are able to swiftly sell their company at a reduced all-cash price.

Although life-settlement viability is assessed on a case-by-case basis, general purchasing parameters are the same. The insured must be 65 or older; the life insurance policy must have been in effect for a minimum of two years; and the policy's death benefit must be at least $250,000. The simplified underwriting process involves only paperwork, and there are no application or appraisal fees.

Caveats

Although selling obsolete business life insurance policies in the secondary life insurance market can be profitable, navigating the labyrinthine life-settlement marketplace can be challenging. The nascent life-settlement industry generally lacks ample due diligence and transparency, as well as specialized knowledge of and services responsive to the unique needs of retiring business owners in the process of selling their companies.

Working with an independent adviser who has expertise in life settlements and exit planning can help you secure the highest-quality institutional offer, safeguard your privacy and make the process of coordinating the sale of your obsolete business life insurance policies with the sale of your company as hassle-free and efficient as possible.

A favorable solution

Retiring business owners, frustrated by inadequate purchasing offers for their firms, often unknowingly discard valuable assets by surrendering cash and lapsing their expendable business life insurance policies. Selling these policies in the secondary life insurance market can allow you to gain substantial liquidity, which can help you quickly sell your business for a desired price and on favorable terms.

Rhona Sacks, JD, MBA, CLU, is founder and president of Legal Life Settlements, San Mateo, Calif., a specialty mergers and acquisitions advisory company.