First I want to thank Louise Pumphrey who is a great insurance strategist for one of my clients for answering a question about what if a bankruptcy happens for a business owner in connection with their cash value in their life insurance policy.
Second let me tell you that I am not an attorney and I do not sell insurance. Just in case you were scared that I might sound too brilliant or sell you something. What I do is help business owners put in place a plan to prepare for the identified "what if's" so they do not get ding'd on price once the buyer of their company starts the due diligence. Then I ask for the experts, like the attorney, accountant or in this case the insurance advisor to provide advice and solutions to solve the "what if's."
I received a call the other day to help an owner work out of a chapter 11 bankruptcy who has yet to file. I don't normally work with owners that are looking to file bankruptcy but rather with owners who have great success in growing their companies. But the call certainly prompted me to start asking the question about what would happen to the life insurance cash value, an insurance product often used to mitigate business "what if's", should the business owner, for some unforeseen reason, had to file for bankruptcy. And the short answer is this, "it depends". Mostly it depends on the state laws you are incorporated in and also what attorney you hire to file your bankruptcy. I'm also sure an attorney could list a dozen other "depends" in addition as well.
But you should know that in many states there are some protections to your life insurance cash values against creditors. John Hancock Insurance company has a good piece on this subject, just click link for the pdf Document. I'm not promoting John Hancock but just sharing information as this disclosure will make my attorney happy.
The benefit to you, should you go through a bankruptcy, might provide you enough funds to start another company or enjoy a long overdue vacation mending your wounds. But because of the possible protection against creditors please think carefully before you pull out cash value, from the policy, in a last ditch effort to avoid bankruptcy. Obviously the product was not designed for this purpose. But remember you can always be creative in the way you use products and/or agreements to protect your company and yourself.
And this is where I stop writing because I'm not an attorney and it would be silly for me to write as if I were. But should you have more questions on this matter please contact me and I can get you in touch with a couple of attorneys who will answer some of your questions as a matter of curtsy to Austec.
John Hamel is the Managing Member of Austec Business Transitions, LLC. helping businesses optimize value relative to exiting their company.