Cashing Out of Business

Historically, exiting entrepreneurs faced limited disposition options when changing needs rendered their business-life policies unnecessary. This allowed the policies to lapse, thereby forfeiting the value of all premiums paid or surrendering the policies to the original insurance carrier for their cash-surrender value, an amount that doesn’t reflect their true value.

Today, there’s another option. You can use an innovative asset-optimization technique—a life settlement—to convert the hidden value in qualified business-life insurance contracts to significant immediate cash, providing a much higher return on your investment.

A life settlement is the sale of a life-insurance policy to an institutional investor for a cash payment that is greater than the policy’s cash-surrender value. The platform for the life-settlement industry was created in 1911 by virtue of a court case, Grigsby v. Russell. In this seminal case, the U.S. Supreme Court declared insurance policies to be personal property and freely assignable, thereby granting a policyholder the right to transfer ownership to others.

With a life settlement, when your no longer needed term or cash value, business-life policies are sold for the highest quality institutional offer; you receive a lump-sum cash payment that can be used for any purpose, including facilitating the sale of your company for the desired price and on favorable terms.

Three business partners, ages 69, 71 and 72, were the principals of a successful self-storage company. To fund a cross-purchase buy/sell agreement, each partner owned two $3 million term policies (no cash-surrender value) on the lives of the other partners.

Seeking to sell their firm, these entrepreneurs received no offers they considered adequate for achieving their retirement and legacy goals. Unfortunately, their legal, financial and business advisors were unaware of the enormous value hidden within these business-term policies, believing they were worthless due to having zero cash-redemption value.

Rather than lapse the policies and receive no return on the premiums they had paid for many years, these three wise men sold their policies to institutional investors in the secondary life-insurance market and received cash windfalls of approximately $600,000 each. By coordinating the sale of their company with the sale of their obsolete buy/sell policies, the owners were able to sell quickly at a reduced all-cash price because the life-settlement proceeds provided the money they needed to fill the gap between their original selling price and the offers from buyers.