Taking Care of Business-Owned Life Insurance

Many business owners don’t realize that their life insurance policies require the same upkeep as their business itself.  The truth is, life insurance plays a very important role in business, and therefore the policy must be reviewed as often as your business plan.
In the business world, life insurance benefits business owners, employees, and family members.  A life insurance policy can be the vehicle for many plans:  Key Person, business continuation, buy-sell agreements and even retirement planning.

Unfortunately, due to a combination of factors, a number of businesses are maintaining life insurance policies that are ticking time bombs.  Some of these policies are in the danger of “dying” before you do.  The reason is that these policies are not performing up to their original projections.  Therefore without careful monitoring, your policy may be in danger of lapsing.

The Problems:
One of the reasons this could happen is that the interest or dividend rate at the time of the purchase could be much higher than the current crediting rate of the policy.  And, if there hasn’t been any increase to the amount of the premium, the policy may be greatly underfunded.  This could cause the policy to lapse well before the insured’s projected mortality, unless large amounts of cash are injected.
As with any product evolution, life insurance products have become more efficiently priced and flexible in nature.  In addition, there are many variations of life insurance available that can serve as wonderful alternatives to older policies that are not performing, and/or were never structured properly.

The Solution:
Audit the policy.
Every few years, it’s a good idea to take a step back to examine the big picture of your business’s financial situation.  Performing regular life insurance evaluations for your business is a great way to ensure that your life insurance fits your current needs.
There are many scenarios in which performing an audit could benefit a business owner, including:  increase the death benefit, lower premiums, extend coverage duration. Increase projected cash accumulation, ensure financial strength of the carrier, etc.

Here are a few scenarios why a business owner should take a life insurance audit into consideration:
A business has owned a key man policy on an employee for the past 20 years. After regular premiums have been made over the years, a considerable cash value has grown inside the policy.  But, if the business owner decides to cash in the policy after the employee leaves the company, there could be a sizable tax event.  An audit could uncover these possible tax liabilities.

Another possible situation would be if a business owns a life insurance policy that has been in force for 10-20 years.  The cost of the insurance could be greater in the old policy than for a newer policy.  A policy review could benefit the business owner in this case by resulting in a lower premium payment.
So, keep in mind that when you are reviewing your business plan, you might want to review your business-owned life insurance. If not for one of the reasons mentioned above, then to ensure your business will continue to prosper, even through a time of many hurdles.

Registered Representative Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors are not affiliated.