Are Your Retirement-Bound Business Clients Held Hostage by Pandemic-Related Debt?

As the post-pandemic economy lingers, retirement-age business owners are facing a difficult crossroads. Uncertain economic conditions and excess business debt related to the pandemic may delay an owner’s dream to sell the business and retire.  

With baby boomers (ages 58-76) owning more than 50% of the nation’s estimated 32.5 million small businesses, the financial impact of post-pandemic business debt on this demographic group could be far-reaching.

Supply chain problems, inflation, staff shortages and debt accumulation associated with the pandemic have caused many retirement-age small business owners to reconsider their retirement plans. Some fear they may have to work far beyond the average retirement age for small business owners – 72.6 years according to the SBA.

For financial and insurance professionals committed to offering their valued clients unique solutions to complex financial challenges, this is your opportunity to shine.

Business owners over the age of 65 who own key person life insurance coverage, or an unwanted individual or term life insurance policy, may be eligible to sell their unwanted policies and use the proceeds to reduce their debt-to-capital ratio when negotiating the sale of the business.

This article is intended to help financial and insurance professionals explain the problem-solving potential of life settlements to retiring business owner clients. Topics covered include:

  1. Explore the post-pandemic landscape for retirement-bound business owners
  2. Explain the process involved in selling a policy (including term policies) in the secondary market
  3. Discuss relevant life settlement success stories involving actual small business owners

Post-Pandemic: More business owners are carrying debt  

Seventy-four percent (74%) of small business owners took on debt in 2021 to offset COVID-19 financial losses – up from 71% in 2016 according to a survey by the Federal Reserve System.

In 2020, the U.S. Small Business Administration distributed over 14 million loans worth $764 billion to small businesses, 96% of which were COVID-19 relief loans. Many were later forgiven.

While carrying business debt is often essential to business growth and expansion, achieving the right balance of debt to cash flow is essential. Otherwise, owners run the risk of bankruptcy, a decrease in the value of the business, or difficulty attracting potential buyers.

During the pandemic, all the rules changed and many business owners felt backed into a corner as they took on more debt.  According to Zippia Research, the average small business loan in 2022 is $633,000. 

With that figure in mind, we’ll explore the success story below that reveals how a retired business owner was able to convert and sell his $2 million term policy for a cash windfall of $600,000.

Retirement-Bound Business Owner Sells $2M Key Man Term Policy for $600K

Asset Life Settlements was asked to represent this retiring business owner in selling his key man term policy in the secondary market. We believe this success story helps illustrate the problem-solving potential of life settlements.

Facing several health issues, the 77-year old business owner had decided to retire and spend more time with loved ones. He met with his insurance advisor to discuss ways he could optimize his cash position in order to enjoy retirement and to provide cash gifts to family members.

During an annual review of the senior’s insurance coverage, his insurance agent uncovered a business-owned term policy that had been purchased years ago to fund a buy-sell agreement. The policy, which had now become obsolete due to the insured’s retirement, was nearing its expiration. 

Fortunately, the agent was experienced with life settlements and spotted an opportunity that would help his client generate additional liquidity for retirement. The agent recommended that prior to expiration, the policy be changed from business-owned to individual ownership, and then subsequently converted to a Universal Life policy in order to qualify for a Life Settlement.

The agent brought in Asset Life Settlements to broker the transaction. We submitted the case to 17 different funding sources and received bids from seven prospective buyers that ranged from a low bid of $180K, to the highest, winning bid of $600K.

The client was thrilled with the outcome and very grateful to his agent for having recommended a term conversion settlement. And finally, the agent was pleased to earn commission on the Term-UL policy conversion, as well as commission on the life settlement transaction.

Retired Business Owner Sells $11.6M in Unwanted Business Coverage

This retired business owner was feeling the pinch of annual premiums for $11.6M in life insurance coverage purchased many years ago that he no longer needed.

After discussing the options with his estate attorney and a life insurance professional, he was open to the idea of selling the excess coverage in the secondary market – under the condition that it met his three objectives: (1) To eliminate all future premium payments; (2) to retain a minimum of $1.5M in death benefit coverage for his current estate planning needs; (3) to receive a substantial cash windfall to boost his retirement fund. 

The estate attorney contacted Asset Life Settlements to request that we conduct a preliminary review of the senior's eligibility for a life settlement and to discuss the prospects for meeting all three of the insured’s objectives.

Based on the senior's age and current health, we determined that he fit the general criteria that secondary market investors typically require when purchasing policies. We commenced the bidding process by presenting the case to 11 different institutional funding sources. However, we recognized that we would likely face challenges due to the fact that the total insurance package was comprised of three separate policies which could complicate the transaction.

The largest policy was a $10M policy owned by a corporation established by the retired executive for business expansion and succession purposes. Now that the companies were operating successfully and debt exposure was no longer an issue, a life settlement with the highest retained death benefit option made the most sense.

The second policy, valued at $1.5M, was purchased by the retired business owner as a key man policy when he and his business partner initially launched the business. Before selling his business interest to his partner and retiring, the insured transferred ownership of the key man policy to a family trust.

The third policy, valued at $60,000, was a UL policy purchased for $20,000 when the insured's first child was born. The policy’s death benefit and the cash build-up grew over the years. In spite of the fact that the value of the policy did not fit the minimum purchasing guidelines of most funders (typically $250K), we were able to eliminate that hurdle when negotiating the merits of the entire transaction.

The Outcome: In spite of the hurdles and the complexity of the case, Asset Life Settlements was successful in narrowing down the field of buyers and negotiating a life settlement package that exceeded the insured’s goals: (1) Eliminated all future premium payments; (2) Retained $2 million in death benefit coverage; (3) Received a cash settlement of $240K

Key Take Aways

Financial advisors and insurance specialists have an opportunity to demonstrate they have their clients’ best interests in mind. When retirement-bound business owners turn to you for sound guidance, let them know that the cash from selling an unwanted policy may help reduce business debt and facilitate their retirement plans.

Call us at 1-855-768-9085 to explore your client’s eligibility for a life settlement or to request a free policy appraisal.