30 Apr Life Settlements Can Unlock Hidden Cash
Whether you’re a buyer or a seller, you’re likely looking for ways to increase the value of your M&A transaction. One often-overlooked source you may not have considered is lapsed or surrendered life insurance policies. These policies can provide hundreds of thousands of dollars per policy in “found cash.”
NEW USES FOR AN OLD POLICY
Businesses often take out key person insurance policies on employees they consider vital to the continuing financial health of the company. When a key person dies or becomes incapacitated, a key person policy provides a cash settlement to help sustain the company while it recovers from the loss. A company’s needs, however, can change over time, and this coverage may no longer be needed because the employee has retired, has left the company, or doesn’t plan to remain after a merger or acquisition. Often, businesses allow these policies to lapse or they surrender them for their cash value. But a third option — a life settlement — can be more lucrative.
With this option, you sell your unneeded policy to a third party for more than its cash surrender value but less than its death benefit. You receive a cash settlement for the policy, and the third party assumes premium payments, ultimately receiving the death benefit at the end of the insured individual’s life. The life settlement process functions as a more liquid secondary market for life insurance, including term, whole life, universal life, variable life, group and survivorship policies.
FINDING A BUYER
If you decide to raise cash this way, you’ll need to work with a life settlement broker. Your broker will have you complete an application that includes medical and policy information release forms (though no physicals will be required). With the information you’ve provided, your broker will obtain an appraisal of the policy, and then send it to major financial institutions for bids. Your broker then reviews the bids with you, and helps you select the best one. When you sell your policy, you’ll receive a lump sum amount from the purchaser who also will pay your broker a fee for his or her services.
The risks of a life settlement are minimal. It costs you nothing — your broker pays for medical and any other reports and you are under no obligation to accept a bid that isn’t to your liking.
HOW TO BENEFIT
The money from a life settlement can be very useful when it comes to financing an acquisition. Say, for example, a prospective buyer is $2 million short of the agreed purchase price, but the business has $10 million in key person term life insurance policies. While the cash surrender value of these policies is only $800,000, their life settlement value is $3.5 million. By using a life settlement, the seller can more than make up the difference in the purchase price and accept the lower bid.
Buyers potentially can benefit from these policies by identifying them and their life settlement values during the due diligence process. If they’re included in the pool of assets purchased with the company, buyers can sell them after the transaction closes for a quick cash infusion.
While they may not seem the most obvious source of value, key person insurance policies are worthy of scrutiny as you’re contemplating a business sale or acquisition. Policies thought to have no cash value could, in fact, be quite valuable.
Austin Dale Group, Inc. is not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assumes no liability whatsoever in connection with its use.