Cpa's Side Hustle: Selling Life Insurance

Certified Public Accountants (CPAs) play a crucial role in advising clients on various financial matters, including the value of life insurance assets. While the primary function of life insurance is to provide financial security for surviving family members, it can also serve as a hidden asset for retired individuals. CPAs can guide clients in maximizing the financial benefits of their life insurance policies, such as restructuring policies with retained death benefits or leveraging policies for accelerated benefits. Additionally, CPAs can facilitate the sale of life insurance policies, ensuring their clients make informed decisions and receive a fair deal. In the context of business partnerships, CPAs are essential in evaluating the business's value and facilitating a smooth transition upon the passing of one of the partners through buy-sell insurance policies. Overall, CPAs play a trusted role in helping clients navigate the complex world of life insurance and ensuring their financial interests are protected.

CPAs can advise clients on the value of their life insurance assets

CPAs are in a unique and trusted position to advise clients on the value of their life insurance assets. Life insurance is often a significant but overlooked asset in a client's portfolio, and CPAs can help them maximise the personal financial benefit from any life insurance policy. For example, a CPA can advise a client to keep their policy in force if they need the full cash benefit for personal financial, tax planning, or estate funding reasons.

CPAs can also help clients understand that life insurance policies can have value even if they are not held to maturity. In the past, many seniors who could no longer afford their policies simply let them lapse or surrendered them back to the insurance company. However, a client's life insurance policy can be a major financial asset, and CPAs can help them evaluate the policy and determine if it still serves its strategic purpose. If the policy is no longer needed or affordable, CPAs can advise clients on their options for converting it into an asset that works for their benefit.

One option is to restructure the policy with retained death benefits. For example, a client who no longer wants to pay premiums on a life insurance policy but still wants some coverage may choose to sell a portion of the death benefit in exchange for a retained death benefit. This allows the client to stop making premium payments while still ensuring their beneficiary receives a payout upon their death.

Another option is to leverage the policy for accelerated benefits, known as a "living benefit rider." This allows the client to receive cash advances against the death benefit, which can be used for medical expenses or other personal financial needs. However, this option is typically only available to clients with a catastrophic or terminal illness.

CPAs can also advise clients on taking out loans collateralized by the policy if it has built up cash value. The client can borrow up to the policy's cash surrender value, and the loan is typically collateralized by the life insurance policy itself, so the client is not required to repay it. However, if the loan is not repaid, the insurance company will reduce the death benefit paid to the beneficiaries by the amount of the loan plus interest.

In addition, CPAs can assist clients in selling their life insurance policies outright for a lump-sum cash payment. This is known as a life settlement, and it can enable the client to obtain a higher value than the policy's cash surrender value. The CPA can play a crucial role in this process as a trusted financial adviser, reviewing any offers with the client and helping to determine if it is a good deal for the client's family.

Life insurance policies can be sold for a cash settlement

The process of selling a life insurance policy involves finding a buyer, meeting basic qualifications, and discussing options with a licensed provider. The steps are as follows:

• Find an experienced life settlement provider: Researching the life settlement industry is the easiest way to find a potential buyer. Licensed life settlement providers will have experienced professionals who have a deep understanding of the specifics of life settlements.
• Meet the qualifying factors: To sell a life insurance policy, certain minimum requirements must be met. These include owning a policy with a death benefit of at least $100,000, and the policy owner is typically over 60 years old. A decline in health since the policy was issued can also improve the chances of qualifying.
• Take a detailed health questionnaire: A detailed health questionnaire is completed to provide an in-depth look at the insured's health.
• Provide authorization to the provider: The insured and the policy owner (if different) authorize the life settlement provider to access medical records and contact the insurance company.
• Share policy details with the life settlement provider: A copy of the policy contract and a premium illustration are provided to the life settlement provider to give them insight into the specifics of the policy.
• Underwriting process: The life settlement provider evaluates all the information and medical records to determine the value of the policy and make an offer.
• Complete the closing process: This involves the transfer of policy ownership and accompanying documentation. The settlement payment is placed in escrow until the insurance company verifies the change of ownership, after which the payment is released.

The amount of cash offered for a life insurance policy depends on several factors, including the insured's age, health, and policy type. The payment will be less than the death benefit, allowing the buyer to make a profit. The older the insured, the higher the payout, as life expectancy and estimated premium obligations are key factors in determining the value.

It is important to note that selling a life insurance policy has some drawbacks. The biggest is giving up life insurance coverage, meaning heirs will not receive a death benefit. Additionally, there may be tax implications and fees associated with the transaction. However, for those who no longer need their life insurance coverage or are unable to afford the premiums, selling their policy can provide a valuable source of cash.

Life insurance is a major asset owned by clients

Life insurance is often a major asset owned by clients. CPAs have a privileged opportunity to ensure their clients' policies are serving their best financial interests. People purchase life insurance for many reasons, such as providing an inheritance for their surviving spouse and children, protecting their family from unpaid debts, and paying for their funeral expenses.

CPAs can advise clients on the value of their life insurance assets. This includes helping clients understand their options if they own a life insurance policy they can no longer afford or need. For example, a CPA can advise a client on how to restructure their policy to include a retained death benefit, allowing them to stop paying premiums while still retaining some life insurance coverage. CPAs can also guide clients through the process of selling their life insurance policy, helping them navigate the complex steps and ensuring they get a good deal.

Additionally, CPAs can assist business owners in evaluating their business and determining the need for buy-sell life insurance. This type of insurance helps ensure a smooth transition and continuation of the business in the event of a partner's passing. It provides the surviving partner with the financial resources to buy out the deceased partner's share from their family, preventing the spouse or heir from becoming a legal partner and potentially disrupting the business.

By understanding their clients' unique circumstances and goals, CPAs can provide valuable insights and recommendations to ensure their life insurance policies align with their current financial needs and long-term objectives.

CPAs can advise on restructuring a life insurance policy

One option is to retain death benefits. For example, a client who no longer wants to pay premiums but still needs some life insurance coverage can choose to sell a portion of the death benefit in exchange for a retained death benefit. This allows the client to stop paying premiums while still ensuring their beneficiary receives a payout upon their death.

Another option is to leverage the policy for accelerated benefits, also known as a "living benefit rider". This allows the client to receive cash advances against the death benefit to pay for medical expenses or other financial needs. However, this option is typically only available to those with a catastrophic or terminal illness.

CPAs can also advise clients on taking out loans collateralized by the policy. If a life insurance policy has built up cash value, the policyholder may be able to access these funds through withdrawals or policy loans. The interest on the loan is typically added to the loan amount, and the policy itself serves as collateral.

In addition, CPAs can help clients explore the possibility of selling their life insurance policy outright. This is known as a life settlement, and it can provide the client with a lump-sum cash payment. The buyer of the policy then takes over future premiums and receives the death benefit when the client dies. CPAs can assist in this process by reviewing offers, determining the client's basis in the policy, and establishing which documents are required for the transaction.

By advising on restructuring a life insurance policy, CPAs can help clients maximize the value of their assets and ensure their financial interests are protected.

Buy-sell life insurance can help a business transition to a single owner after a partner passes away

A certified public accountant (CPA) can advise clients on the value of their life insurance assets. Life insurance is a staple of any client's portfolio, and a CPA financial advisor can help them maximize the personal financial benefit from any life insurance policy.

Buy-sell life insurance is a crucial component of a buy-sell agreement, which is essentially a business owner's version of a prenuptial agreement. It serves as a safety net in the case of death, disability, or disagreements within the business. This type of insurance helps businesses navigate unexpected transitions smoothly and ensures that financial burdens are minimized and the transition remains smooth and stress-free.

In the case of a single owner transitioning the business after a partner's death, a buy-sell agreement backed by life insurance can provide stability and continuity. Here's how it works:

How Buy-Sell Life Insurance Helps in Business Transition

When a partner in a business passes away, the buy-sell agreement outlines the process for transferring ownership and ensures a smooth transition. The agreement typically involves the remaining partners buying out the deceased partner's share of the company. The buy-sell life insurance policy provides the funding for this transaction, using the death benefit to purchase the deceased partner's interest in the business. This relieves the surviving partners from having to sell off company assets or bring in external investors, allowing them to continue normal operations without disruption.

Types of Buy-Sell Agreements

There are two main types of buy-sell agreements: cross-purchase and stock redemption plans.

Cross-Purchase Buy-Sell Agreement

In this structure, each owner purchases a life insurance policy for the remaining partners. The death benefit is typically equal to each partner's share in the business. Each owner is the beneficiary, premium payer, and owner of the policies they purchase on the lives of the other owners. This type of agreement has tax advantages, as the family of the deceased partner's tax basis will be equal to the fair market value at the time of death.

Stock-Redemption Buy-Sell Agreement

In a stock redemption plan, also known as an entity purchase agreement, the company itself purchases life insurance policies for each owner. If a shareholder dies, the company uses the death benefit to buy the deceased owner's share from their heirs. This provides immediate liquidity for the deceased shareholder's family at a fair market value. Stock redemption agreements are simpler to manage when there are multiple partners, as only one policy per partner is required.

Benefits of Buy-Sell Life Insurance

Buy-sell life insurance provides several benefits in the event of a partner's death:

• It ensures a fair and undisputed purchase price for the deceased partner's share, preventing emotional conflicts during ownership changes.
• It provides immediate cash benefits, allowing the business to continue normal operations without selling off assets or involving external family members or investors.
• It helps protect important business assets by covering outstanding business debts and preventing creditors from seizing property or other valuable assets.
• It can equalize an estate, ensuring that heirs who do not inherit ownership in the business still receive a fair share through the life insurance payout.

In conclusion, buy-sell life insurance plays a vital role in helping a business transition to a single owner after a partner's passing. It provides financial stability, minimizes disruptions, and ensures a smooth ownership transition, allowing the surviving partners to focus on keeping the business running successfully.

Frequently asked questions