Every once in a while, after completing our cash flow efficiency audit with a business owner and identifying their goals whether it’s business succession, key person retention, or business exit strategies we discover that the business owner can’t get insurance. The question we’re answering today is: How do we achieve these goals using life insurance when the business owner isn’t insurable?
Our health is one of the most fragile things we have. One medical event or diagnosis can make someone uninsurable. So how can we still accomplish goals typically achieved through life insurance if the business owner can’t actually be insured?
One of the most important things life insurance helps solve is access to capital. The way we design policies is focused on cash accumulation. So whether the death benefit is intended for business succession, key person retention, or an exit strategy, the key function of the insurance is still access to capital to run and grow the business.
We’re not only using it for the long-term death benefit. That benefit is triggered by the same event that causes the financial problem the business owner’s death. But along the way, we’re using the cash value that builds in the policy to help the business owner meet financial goals while still alive.
Here’s one simple solution. Suppose the business owner is uninsurable. For an exit strategy, we could insure the business owner’s spouse or adult child. The business owner would still have access to the cash value within the policy. The downside? When the business owner dies, there’s no death benefit, since the insurance was not on them. But if the purpose of the policy is cash accumulation not death benefit that’s not a problem.
At the end of the day, we need to find an insurable body. As long as there’s an insurable interest between the business owner and that insured person, we can properly structure the policy for cash value accumulation.
This works well when our cash flow efficiency audit identifies places where a business owner is unknowingly and unnecessarily giving up control of their money. After identifying those areas, we redirect that money into something more efficient and beneficial often, a whole life insurance policy designed for cash value growth. That way, the business owner can access that money during their lifetime, and depending on who is insured, still recover the cost through the death benefit later.
In this setup, the only variable is when the death benefit is triggered not how the cash value functions along the way.
Let’s take another scenario: business succession. Two partners, A and B. A is insurable. B is not. B can insure A. But what can A do? A could potentially insure B’s spouse or another key employee in the business. Again, if B passes away, there’s no death benefit, but that’s okay. The policy still builds cash value, which the business can use to plan an eventual exit.
The goal of business succession insurance is not only to plan for an unexpected death but also to build up a fund for a buyout or exit while both partners are still alive.
Now consider key person insurance. If the person you want to insure isn’t eligible due to health, you could instead insure yourself or another valuable employee while still accessing the cash value to run and grow the business.
Building cash value in these policies gives you options. You can expand the business, invest in new equipment, stock up on inventory, or take advantage of opportunities as they arise. You can also use it to retain key people, offer perks and benefits, and reduce the risk of them leaving for another job.
That’s the whole point. You’re buying the policy as a strategic business tool for key person retention, succession, or exit planning and the cash value becomes a powerful, flexible benefit along the way.
In conclusion, to purchase life insurance, you need an insurable person someone healthy enough to qualify. But once the contract is in place, you can build significant cash value that’s available while everyone is still alive. Eventually, depending on who the insured person is, a death benefit will be paid. That death benefit essentially recycles the premiums paid into the policy covering the cost of achieving your goals.
If you’d like to learn more about how to apply this strategy to your business and specific situation, visit our website at www.tier1capital.com and click the “Schedule Your Free Strategy Session” today. We’ll do a deep dive on your needs and offer creative, tailored solutions.
Thanks for reading, and remember it’s not how much money you make, it’s how much money you keep that really matters.