Understanding Life Insurance: Business Worth And Value

As an independent insurance agent, your book of business is your most valuable asset. It represents the potential income you will earn over the course of your career. When selling your book of business, you are essentially putting a price on your hard work. The cost of a book of business is usually 1.5-2.5 times the annualised gross commission. However, there are several factors that determine how much your book of business is worth. These include the size of the book, the types of insurance policies, the territory covered by the insurance agency, and the retention rate of customers.

How to value your life insurance book of business

As an independent insurance agent, your book of business is your most valuable asset. It represents the potential income you will earn over the course of your career. When you decide to sell your book of business, you are essentially putting a price on the years of hard work you have invested.

There are several factors to consider when valuing your life insurance book of business. Firstly, remember that it is not just a collection of policies, but also a valuable source of income and customers. Therefore, you should consider the size of your book, the types of coverage, and your customer retention rate. A larger book of business will typically be more expensive to buy than a smaller one, and the mix of policies can also impact the value. For example, life insurance policies often have a high face value, making them worth more to the insurer.

Another factor to consider is the revenue generated by the book of business. The Multiple of Revenue method values the book as a percentage of revenue, usually based on the prior fiscal year or trailing 12 months. This method is commonly used when acquiring a book of business as a specific asset and is easier to explain and understand for less sophisticated buyers and sellers.

Alternatively, the Multiple of Earnings or EBITDA method values the book based on the operating cash flow or earnings. This method is more exact and informative but requires more analysis and due diligence. It is commonly used when acquiring an entire operation or a larger book of business with significant expenses or complexity.

When determining the value of your life insurance book of business, it is also important to consider the product mix and income. Some products, such as life insurance, generate residual income through renewals, making them more valuable than products without recurring income. Loyal customers who renew their policies can significantly increase the value of your book of business.

Finally, don't forget to consider the territory and market trends when valuing your book of business. Ensure that the territory covered by the insurance agency aligns with your demographic and that you are familiar with the area, including crime rates and the types of customers. Look at any major changes or new rules that may affect the insurance product you sell.

Factors impacting agency valuations

As an independent insurance agent, your book of business is your most valuable asset. It represents the potential income you will earn over your career. When selling your book of business, you are essentially putting a price on the years of hard work you have invested.

Size of the Book of Business

The size of your book of business is critical in determining its value. A larger book of business will generally be more expensive to buy than a smaller one. This is because it represents more work in acquiring or renewing policies and indicates greater potential income.

Type of Insurance Policies

The type of insurance policies in the book of business also matters. Life insurance policies, for example, are often sold in large policies with high face values, making them more valuable. Other valuable types of insurance include property and casualty coverage, which provide consistent revenue. The mix of policies in a large book can be almost as important as the size.

Retention Rate

Your retention rate reflects your success in maintaining client relationships over time. A high retention rate indicates a strong relationship with customers and increases the value of your book of business. Excellent customer service, building strong relationships, and addressing concerns promptly are key to improving retention rates.

Territory and Market Trends

The territory covered by the insurance agency is an important consideration. It is essential to understand the crime rates, customer risk profiles, and local market trends, such as major construction or new businesses, that may impact the insurance products you sell.

Demographics and Customer Base

Ensure that the territory's demographics align with your target market. For example, if you don't want to insure young drivers, avoid buying a book of business near a large university. Assess the value of the customer base to determine if the asking price is appropriate.

Agency Vendors and Best Practices

When considering buying an insurance agency, ask about their vendors, how they nurtured customers, and their sales strategies. Request an audit and review cybersecurity filings and agency practices to understand their operations better.

Lines of Insurance and Licenses

As a buyer, ensure you can service the clients' needs by offering the necessary lines of insurance. For example, if clients have life insurance, and you only have a P&C license, you may lose those clients and their P&C business.

Valuation Methods

There are several methods to value an insurance agency or book of business:

• The Capitalization Method considers the risk-free rate of return for the buyer and adds a risk factor.
• The Price/Earning Method values the book at an average of six times the pre-tax profit.
• The Present Value of Future Earnings Approach focuses on the book's earning potential.
• The Multiple of Revenue Method expresses the value as a percentage of revenue from the prior fiscal year or trailing 12 months.
• The Multiple of Earnings (EBITDA) Method is based on the operating cash flow and is used when acquiring an entire operation or a large book with significant expenses or complexity.

How to sell your life insurance book of business

A life insurance book of business is a valuable asset, representing the potential income you will earn over your career. It is not just a collection of policies but a source of income and customers. When selling your life insurance book of business, you are essentially valuing the years of hard work you have invested.

Timing is Important:

Selling your book of business too late can result in losing key accounts, reducing the overall value. Therefore, it is crucial to prepare and plan your exit strategy in advance to maximize the value of your book.

Understand the Value of Your Book:

The value of your book of business depends on various factors, including the size of your book, the types of coverage, and your customer retention rate. A large book of business is generally more valuable, especially if it includes life insurance policies or property and casualty coverage, which tend to generate higher revenue.

Choose the Right Method of Valuation:

There are typically two primary methods to value your book of business:

• Multiple of Revenue: This method values the book as a percentage of revenue from the prior fiscal year or trailing 12 months. It is simpler and easier to explain and understand, especially for less sophisticated buyers and sellers.
• Multiple of Earnings (EBITDA): This method values the book based on the operating cash flow or earnings. It requires more analysis, due diligence, and effort but provides a more exact valuation, especially when acquiring an entire operation or a larger, more complex book of business.
• Direct Comparison:

When comparing the two valuation methods, consider the "backend" portion of the transaction, such as an earnout or royalty. An earnout ties the seller's payout to the success of the buyer, incentivizing the seller to aid in client retention.

Non-Recurring Income:

Buyers often discount non-recurring income when valuing a book of business. Common types of non-recurring income include fees, non-renewing commission revenue, and contingency income.

Choose the Right Buyer:

You can sell your book directly to another local agent or insurer, which can be faster and may result in a better price. However, it is riskier as you may not get the best terms or the highest payout due to limited market exposure. Alternatively, you can use a third-party broker to sell to a larger insurance company, which can take longer but may result in a higher sale price.

Get Paid:

After agreeing on the terms, you can choose from various payment methods, each with its pros and cons. These include lump sum, over time, and earn-out payments. The lump sum method is the fastest but riskier for the buyer, who may offer a lower price due to concerns about projected growth or sales. Getting paid over time guarantees payment but may result in the buyer trying to downsell. Earn-out payments can result in higher rewards but are riskier for the seller.

Remember, when selling your life insurance book of business, it is essential to consider all factors impacting its value and choose the right valuation method, buyer, and payment method to ensure a smooth and profitable transaction.

What to look for when buying a life insurance book of business

When buying a life insurance book of business, there are several key factors to consider. Here are some important aspects to look for:

Territory and Market Understanding:

Firstly, understand the territory that the insurance book covers and ensure it aligns with your licensed area of operation. Study the area's crime rates, customer risk profiles, and market trends. Are there any upcoming major changes, such as new businesses or construction projects? These factors can impact the risk assessment and insurance needs of the customers in that territory.

Product Mix and Income:

Analyze the product mix offered by the insurance book of business. Look for policies that generate consistent and high revenue. Life insurance policies, for example, tend to have a high face value and bring significant income to the insurer. Also, consider the income generated by the book over the last year and its performance over the last several years. A book of business with strong and consistent income is more valuable.

Customer Retention and Loyalty:

Examine the customer retention rate, as this reflects the agency's relationship with its customers. A high retention rate indicates that customers are likely to keep renewing their policies, increasing the value of the book of business. Loyal customers who have been with the agency for a long time are more likely to stick with the new owner.

Agency's Best Practices and Cybersecurity:

Ask questions about the agency's best practices, such as how they nurtured existing customers, sold surplus lines, and handled cybersecurity. Request an audit and review the agency's cybersecurity filings to ensure they have proper data protection measures in place. This due diligence will help you understand the agency's operations and identify any potential risks or issues.

Your Ability to Service the Clients:

Ensure that you are licensed to sell the lines of insurance offered by the agency. For example, if you only have a P&C license and the book of business includes life insurance clients, you may not be able to service those clients properly, leading to a loss of value. Make sure you have the necessary qualifications and carrier relationships to service each client effectively.

Valuation Methods and Payment Structures:

Familiarize yourself with different valuation methods, such as the Capitalization Method, Price/Earning Method, and Present Value of Future Earnings Approach. Understand the value of the book of business based on these methods and industry standards. Also, consider the payment structure for the purchase. You can opt for a lump sum payment or spread out payments over several years. The seller may prefer a certain structure for tax purposes, so understanding these options can help you negotiate a deal that works for both parties.

Remember, buying a life insurance book of business requires thorough research and due diligence. By considering these factors, you can make a more informed decision and increase your chances of a successful purchase.

How to increase the value of your life insurance book of business

As an independent insurance agent, your book of business is your most valuable asset. It represents the potential income you will earn over the course of your career. When you decide to sell your book of business, you are essentially putting a price on the years of hard work you have invested.

Focus on customer retention and loyalty:

A high customer retention rate indicates a strong relationship between the insurance agency and its customers. This will increase the value of your book of business. Provide excellent customer service, build strong relationships with your clients, and ensure their satisfaction. Loyal customers are more likely to renew their policies, increasing the value of your book.

Diversify your product mix:

Offer a range of insurance products that provide residual income, such as life insurance policies with high face values. Diversifying your product mix can increase the value of your book of business by providing a more stable and consistent income stream.

Increase new business:

Focus on growing your business by attracting new customers. This will naturally follow from providing excellent customer service and building a strong reputation. A growing business with a diverse range of products will be more attractive to potential buyers.

Implement a Customer Relationship Management (CRM) system:

Using a CRM system to manage customer data saves time and effort for potential buyers. It demonstrates that you have a well-organised and efficient system in place, making your book of business more attractive and valuable.

Build a strong business culture:

A positive and trustworthy business culture can foster customer loyalty and increase the value of your book of business. If customers have a positive experience with your agency, they are more likely to remain loyal, increasing the retention rate and overall value.

Understand the market and industry trends:

Stay informed about market trends and changes in the insurance industry. This includes being aware of new rules, regulations, and local laws that may impact the insurance products you sell. Understanding the market and industry trends can help you make informed decisions about your product offerings and territory coverage, ultimately increasing the value of your book of business.

Diversify your lead generation strategies:

In addition to your book of business, consider diversifying your lead generation strategies. Buying insurance leads from reputable vendors and thoroughly working each lead can result in a higher profitability rate, complementing the value of your book of business.

By implementing these strategies, you can increase the value of your life insurance book of business, making it more attractive to potential buyers and maximising your return on investment. Remember that the value of your book of business is closely tied to the income it generates and the relationships you have built with your customers.

Frequently asked questions