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Business Insurance May Be the Best Hedge in Uncertain Times

Properly designed business insurance is probably the most flexible form of investment for business owners to hedge against the unknown.

Judith A. Hasenauer, 10/04/2012

As the economy remains mired in a lackluster recovery following the financial "meltdown" of 2008, there has been a great deal of discussion in the media about the phenomenon of the large amounts of cash being held by American businesses waiting for some degree of certainty about the scope of tax law changes and new regulatory structures.

This time of potential change seems to call out for business owners to look toward the advantages of business insurance to provide a degree of certainty that will persist regardless of the changes that may come. The lack of clarity regarding potential changes in the federal estate taxes surely exacerbates the need for financial planners and businesspeople to seek the certainty that is provided by business insurance.

For many decades, business owners have looked to cash-value life insurance as a means to provide for business continuity, to fund potential estate taxes, and to ensure that businesses will survive the death of a key employee or business partner. Life insurance is uniquely suited for these purposes because of the lack of current taxation of increases in cash values and the income tax-free passage of death proceeds to the persons who need ready cash to accomplish the plans of the decedent or of the other participants in the business enterprise.

Although there have been a number of changes in the tax laws applicable to business insurance products and their uses, properly designed business insurance is still probably the most flexible form of investment for business owners to hedge against the unknown. The current time of potential change makes cash-value life insurance uniquely suited as an investment for excess cash. True, interest rates are low both within and without life insurance products. Nevertheless, the tax advantages make cash-value life insurance more attractive in today's environment than other forms of investment.

Insurers offer a wider array of cash-value life insurance products than at any time in history. With proper planning, a financial advisor can provide access to products that will suit most business needs, from more volatile variable life insurance products, to high cash-value fixed products, to products that emphasize death benefit elements. Risk tolerance can be evaluated and products selected that satisfy even the most conservative or the most aggressive investors. Yet, the certainty of the availability of the death benefit remains to provide the confidence necessary to continue whatever business plan may be selected.

Recent years have seen a "flight to quality" where the larger, more secure insurers have seen increases in their market shares. Despite this urge to purchase products only from the larger insurers, there remain a great many smaller insurers with sound finances, great product flexibility, and underwriting practices that may not always be available from larger insurers. It is wise to shop the market, always seeking those products that will fill the needs of the insurance purchaser.

Most insurers also have available products other than life insurance policies that can promote certainty in a time of change. Disability income products and disability buyout products can go a long way toward providing business owners and key employees with the security they may need. This is particularly true when such products are combined with cash-value life insurance. Underwriting standards for disability products are often more stringent than is the case with life insurance since the odds of a person being disabled before the age of retirement are much greater than are the odds of the same person dying prematurely.

Failure to understand the risks of disability for business owners, business partners, and key employees is one of the more common mistakes we see within the business community. This is particularly true in business situations where the plan is for a partner or key employee to buy out a business owner, and the transaction is frustrated because the prospective purchaser becomes disabled.

Judith A. Hasenauer, JD, CLU, is an attorney with the law firm of Blazzard & Hasenauer, P.C. She devotes her practice exclusively to the financial services industry, providing consulting on the development and regulatory clearance of products, compliance issues, distribution issues and related matters, such as advisory activities and industry initiatives.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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