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There's More To Business Life Insurance Than The Claims It Pays

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Although my career in financial services has been varied, life insurance continually pops up as a topic. Particularly when working with privately-owned businesses, the issues concerning this product are complex and many; and, of course no one really wants to talk about death. However, because September is Life Insurance Awareness Month, it seems an appropriate time for me to suggest some reasons why business owners should actually care about life insurance. As unpleasant as the topic may be for some, good business planning demands consideration of this important financial contract.I’ll state the obvious: life insurance is a contract where the basic concept is “when you die, we pay.”  When I was a young financial planner, I delivered my first death claim: a check from an insurance company to a widow for $250,000. Her husband had died of a heart attack during their daughter’s wedding reception. That event burned an indelible mark in my attitude about the importance of this product. That death benefit wasn’t wanted by the widow – she saw it as “dirty money” intended to replace her husband – but it was certainly needed by the widow.Surprising to many, however, life insurance can do much more than just provide proceeds to the beneficiary of a deceased insured. For over 30 years, I’ve been a member of a trade group called the Association for Advanced Life Underwriting (AALU).  This group provides financial and legal information to its members (the elite of life insurance professionals), is actively involved in advocacy with Congressional representatives and staff and is generally involved in promoting the importance of life insurance. AALU’s involvement is particularly focused on “advanced” cases. It can be difficult to explain the meaning of advanced cases, but it is somewhat analogous to the more sophisticated uses of banking instruments. Some consumers think banks don’t do much more than accept deposits, and lend that money out to families. They don’t understand the complexity of banking both on the asset and liability side of the equation. Business owners, however, know that there are a variety of complex banking transactions to help support and encourage commerce in the country.

So, too, does life insurance comprise a more varied set of uses than just “when you die, we pay.” With businesses, I’m often involved in life insurance as a funding vehicle for buy-sell agreements, as an executive benefit, as a way for a company to indemnify itself against the loss of a key individual, and a myriad of other uses. In my experience, I’m seeing life insurance more and more being used as a corporate finance tool — offering cash flow, accounting and tax advantages. With the recent increase in income taxes for the affluent and wealthy, the tax advantages of life insurance, both at the death benefit and cash value levels, have struck a chord with many financial advisors. Through the AALU and other organizations, the life insurance industry has done a good job protecting the interests of the life insurance product for both consumers and businesses. In the current tax environment, this advocacy is proving particularly useful. Life insurance is a key, tax-advantaged financial tool in business planning.A recent trend is that life insurance has become the contractual chassis for a number of financial needs beyond just the risk of dying. Certainly life insurance addresses the mortality risk, but modern day policies can also help with morbidity issues (chronic care, critical illness and long-term care), permanent disability and even longevity. Cash value life insurance policies are being used in businesses to provide tax-advantaged income streams, liquidity sources and an alternative asset class for portfolio planning.Over the past four decades, I’ve witnessed this product morph from a forced savings vehicle that dads were supposed to buy for their families, to a flexible financial instrument that works in advanced business cases. Whereas it used to be a landline phone with a single purpose in the home, it is now a smart phone used in commerce. No one wants to talk about death, but business owners do want ways to succeed. I suggest you include a life insurance review in your business planning.