Life insurance gets a bad rap. Forget the name. It is just a financial tool that transfers risk for a minor amount of money and can solve many problems for families and companies.

Hello, Janet Killingsworth here and I have been a practicing CPA for over 30 years. My business partner, Lynn Spencer, and I own Killingsworth Spencer CPAs. This might surprise many who read this post, but there are a lot of attorneys, tax professionals, and CPAs, including me, who like life insurance.

I have seen firsthand the benefits of what a properly structured life insurance plan can do for a family, a business, and even a charity. Life insurance is a leveraged asset. Where else can one go to exchange a small amount of money each year (the premium is dependent upon your age and health status), and the designated beneficiary can receive a larger multiple of dollars in return upon the insured’s death?

Business owners insure their buildings, inventory, key personnel, etc. Why not also insure the legacy asset value of a partner or the business itself against the loss of an owner? Say, for example, that you started a business twenty years ago and is now worth $5M. If you have a partner who owns the other 50%, how will your spouse and family realize your value from your most valuable asset from the enterprise? Let’s explore the most obvious options.

  • Sell the business
  • Liquidate it
  • Take a note from the surviving partner(s)
  • Life insurance on both partners for the market value of the enterprise

Take a moment to examine the options and ask yourself which one appears to be the least expensive, painful, and time-consuming. If there is a shortfall at death between the life insurance proceeds and the legacy value, then a note can be structured to be paid over several years.

Here is where I do see the biggest problems with life insurance contracts and how many problems can be avoided beforehand. For the business owner, has the life insurance agent recommended a competent business attorney to draft the buy/sell agreement or the Trust? If not, why not? How often are these agreements reviewed? Who is the owner/beneficiary? It would be best to meet with your advisory team on these and other essential matters every two to three years to make sure everything is as it should be under the then-present scenario. I have also seen plans that were not structured correctly, and guess what? The tax professionals and/or the CPA is the designated party usually charged with cleaning up the mess of a poorly executed plan – not fun.

A CPA knows what is going on in the business because we meet with the owners on a regular basis, and we prepare their tax returns. As tax professionals, if we are included in the process, we can probably help make this a win for all parties. Trust me, the last thing we ever want to have happen is to lose a client over a forced closure or sale of a business; employees do not want this to happen either. When a tax professional is part of the team, we may even help find ways to pay the premiums. In case you were wondering, we get no referral fees or compensation for recommending a client purchase life insurance. In fact, it is against the law unless one is licensed. I do hope you have learned something new today.

Janet Killingworth, CPA