Insuring your future exit.

• Author: Bannon, Mel B.
• Position: CONSULTANT'S CORNER

Business owners are risk-takers by nature. Interestingly, these same owners are often-times risk averse. What this means is that owners will assume risks in one area of their lives but not necessarily work to mitigate risks in other areas. The primary issue in not mitigating risks lies in the fact that, as a business owner, there are a lot of people in your world who rely on you and the decisions that you make. This article challenges the use of insurance in the singular manner of addressing a loss of life. In fact, insurance products are useful tools throughout the spectrum of advanced planning for a future exit. My intention is to discuss risk mitigation and broaden owners' views on how and where insurance can ground and solidify your plans for a future exit (while you are still alive).

An Aleatory Business Contract

Insurance policies are known as aleatory contracts. An aleatory contract is defined as "an agreement concerned with an uncertain event that provides for unequal transfer of value between the parties. Insurance policies are aleatory contracts because an insured can pay premiums for many years without sustaining a covered loss. Conversely, insureds sometimes pay relatively small premiums for a short period and then receive coverage for a substantial loss."

So the financial industry provides a marketplace to understand your business risks and allow you an opportunity to share those risks with another institution. In a limited sense it is a forecast of the future--in the case of insuring the loss of life. If the event/death that you are insuring occurs, you "win" and the insurance company pays. If the event does not occur, you don't necessarily lose because you have some peace of mind.

Insurance as an Asset Class

Insuring for the loss of life is only a small part of utilizing insurance in an exit plan. However, many business owners fail to see the benefits of certain other forms of insurance. Insurance can serve as an asset class and a tool to harvest savings, share benefits, and leave assets on your company balance sheet, as well as sharing an asset with key people to more easily retain them at your company. Most business owners, when thinking about planning for their exit, fail to see insurance as a tool for many facets of a transition plan.

Insurance as an Accumulation Asset for a Future Exit

Some typical goals of business owners who are thinking about a future exit include:

* Having enough retirement income to sustain your...