Unlocking Business Liquidity: How Cash Value Life Insurance Fuels Growth and Valuation

Unlocking Business Liquidity: HowCash Value Life Insurance Fuels Growth and Valuation

Securing and growing your company’s valuation is a top priority for many business owners.

Cash value life insurance offers a unique opportunity to safeguard your business’s long-term future by insuring key people and unlocking liquidity to meet critical business needs.

Acting as its own financial institution, your business can leverage the cash value of such policies to fund growth and acquisitions. Adding cash value life cover will maximise your business’s long-term value and protect it from losing a key person.

In this article, you’ll learn how cash-value life insurance can:

1.    Protect the value of your business

2.    Increase a business sale value

3.    Support your business’s growth and acquisition strategy

4.    Provide shareholder buy-sell agreement funding

5.    Help your business be its own bank

6.    Be used for bank collateral

7.    Give key people a retirement income plan

8.    Fund an employee benefits scheme

9.    Be an alternative asset the business owns

Let’s get started.‍

1. Protecting Business Valuation

Maintaining sufficient liquidity through the policy’s cash value can offset risks during economic downturns or emergencies.‍

Impact on Business Valuation

·     Stabilises cash flow, thereby reducing company valuation volatility.

·     Demonstrates financial resilience to investors, lenders, and potential buyers.

Capital for Life Guidance: Key person coverage and easily accessible cash value help a business remain resilient in unforeseen circumstances, safeguarding operations and the business valuation.

2. Enhancing Business Resale Value

A cash-value life insurance policy can make a business more attractive to potential buyers.

How It Helps

·     Provides a built-in company asset that reduces buyer risk.

·     Eases transition periods post-sale with accessible liquidity.

3. Supporting Business Growth or Acquisition Opportunities

Cash value can also finance growth or acquisitions without incurring traditional debt.‍

Advantages

·     Avoids high-interest bank loans, loan arrangement fees and restrictive loan terms.

·     Preserves financial planning flexibility.

Capital for Life Guidance: Accessing policy loans for expansions or acquisitions can be cost-effective and more flexible than traditional financing like bank loans, letters of credit and receivable financing (factoring).

4. Supporting Buy-Sell Agreements

Having key man insurance is vital for funding buy-sell agreements and ensuring smooth ownership transitions. The buy-sell agreement document together with the key man contract clause lays out how shares will be bought with a key person life policy and transferred if an owner dies or exits.‍

Funding Ownership Transfers

·     The cash value key man policy provides liquidity to purchase a deceased partner’s shares.

·     Prevents forced asset sales or debt obligations to fund buyouts.

If a properly funded buy-sell agreement is not in place, a stranger-owned share purchase or involuntary ownership transfer could occur, which exposes the company to the risk of an unvetted or unknown shareholder acquiring a stake in the business.

Capital for Life Guidance: Key man Insurance supports buy-sell agreements by providing liquidity to purchase a deceased partner’s shares. It stops forced business asset sales or taking on debt to fund buyouts.This ensures the business remains stable and ownership transfers are handled smoothly.

5. Building Business Liquidity Through Policy Loans

Cash value life insurance, like indexed universal life (IUL), accumulates a cash value over time. Businesses can leverage this cash value through tax-advantaged policy loans or withdrawals, acting as their own bank.‍

How It Works

·     The business borrows against the accumulated cash value, using it as collateral.

·     Loans typically do not trigger taxable events (depending on where the company is domiciled).

Benefits for Businesses

·     Provides quick access to funds for operations, expansion, or emergencies, without relying on external lenders.

·     There are no strict repayment obligations; the loan can be repaid via the policy’s death benefit.

Loan for Business Liquidity Example

Trading company XYZ holds an IUL policy with:

·     Policy Death benefit of $40,000,000

·     Policy Cash value of $5,500,000

The company needs $2,000,000 to purchase a manufacturing unit. It becomes its own bank by taking a policy loan from the insurer against its own policy's $5,500,000 cash value.

Loan Account Interest Rate: 5.75% (with a 4.50% credit back due to the loan spread).

Net cost: 1.25% loan spread (+ cost of any lost investment growth potential above 4.50%).‍

Policy Loan: End of Year 1

Interest Payable: $2,000,000 × 5.75% = $115,000 (the company can payor capitalise it).

Assuming the company pays this interest, the insurer credits 4.50%to the policy’s cash value.

Interest Credited: $2,000,000 × 4.50% = $90,000

Net Cost: $115,000 – $90,000 = $25,000

If the insured key person passes away while the $2,000,000 loan is outstanding, the business would still receive $38,000,000 ($40,000,000 death benefit – $2,000,000 loan).

Capital for Life Guidance: By borrowing against its life policy, a business becomes its own financial institution, gaining flexibility and preserving liquidity.

6. Collateral for Business Loans

Many lenders accept a life insurance policy’s cash value as collateral.

How It Benefits the Business

·     Increases borrowing capacity without liquidating other assets

·     Lowers lender risk, making financing more accessible.

Capital for Life Guidance: Private banks commonly use life policies as collateral, but leveraging the insurer’s internal loan facility maybe quicker and cheaper.

7. Enhancing Retirement or Succession Planning

Cash value life insurance can also support executive retirement benefits or succession arrangements.

Examples

·     Serving as a deferred compensation tool for executives through future income from the policy’s cash value.

·     The policy can be cashed in by the business which can then use the cash to pay the retiring executive

·     The policy may also be able to be assigned to the retiring individual (depending upon tax rules)

·     The key person who is the life insured on the policy can change to a new owner or key person.

Capital for Life Guidance: Cash value insurance can replace or supplement traditional pensions or gratuities, ensuring key executives have future income while safeguarding ownership transitions.

8. Funding Employee Benefits

Cash value life insurance often underpins executive compensation packages or retention plans.

Examples

·     Deferred Compensation: The promise of future employee payouts based on policy cash value.

·     Golden Handcuffs: Attach life insurance benefits and potential payouts to key employees to encourage long-term retention.

Benefits for the Business

·     Attracts and retains top talent, strengthening stability and an overall company valuation.

Capital for Life Guidance: Linking benefits to a policy’s cash value or payout can boost loyalty, attract high-calibre employees, and safeguard the company’s future.

9. Diversification of Business Assets and Growth

Using cash value life insurance as an alternative asset class diversifies a business’s balance sheet.

Key Features

·     Cash value grows tax deferred.

·     A cash value policy like an indexed universal life (IUL) can offer stock market-linked growth with guaranteed principal protection, shielding the business from stock market volatility.

·     It provides asset diversification for the business

Impact

• Provides a stable, non-correlated asset that offsets risks from core trading activities.

• Serves as an alternative to traditional investments (e.g., stocks, bonds, real estate).

Capital for Life Guidance: IUL and similar cash value policies offer strong long-term returns with lower risk, complementing a standard portfolio.

Policy Structure and Customisation

Businesses can tailor policies to their specific needs.

Options

• Premium Flexibility: Adjust contributions to suit business cash flow fluctuations.

• Death Benefit Options: Change life coverage over time.

• Change Life Insured: If a key person leaves or the business is sold, the insured can be changed so the policy remains in force.

Capital for Life Guidance: Flexible structures ensure the policy provides value even after significant business changes, offering long-term adaptability.

Conclusion

As a business owner, success often relies heavily on key individuals who drive its growth. Losing a key person could have a significant financial impact on your business. Your valuation can be affected, your shareholders will be impacted, and business loans may be recalled. Your company may suffer substantial losses.

Capital for Life is offering a complimentary business valuation appraisal to help business owners:

·     Understand the company’s value.

·     Identify the financial risk of losing a key person.

·     Determine the right level of key person insurance to safeguard the business.

Our streamlined process is simple:

1.     Book a free key person business consultation with our team

2.     Provide us with you basic business details and las 3 years of accounts‍

3.     Receive a valuation and a tailored insurance strategy to safeguard your business.

Take the First Step in Securing Your Business’s Future

Get Your Complimentary Valuation Now

Don’t wait until it’s too late - take action today to protect your business and its people.

Frequently Asked Questions (FAQs)

What is Cash Value Life Insurance and How Does It Benefit My Business?

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Cash value life insurance (sometimes called corporate-owned life insurance, or COLI) is a policy that builds a financial reserve while providing a death benefit. Businesses often use these policies, including indexed universal life (IUL), to secure liquidity for expansion, mergers and acquisitions, or urgent capital needs—without relying on external lenders. By functioning as its own financial institution, a company can protect its valuation, fund buy-sell agreements, and enhance executive compensation packages.

How Does Cash Value Life Insurance Protect My Company’s Valuation?‍

A cash value policy provides liquidity that can stabilise your business during economic downturns or emergencies. When a key person (also known as key man) is insured, the policy’s accumulated cash value can be accessed for operational needs, helping maintain consistent cash flow. This reduces perceived risk for investors, lenders, and potential buyers, positively impacting your company’s market value.

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Can These Policies Really Fund Buy-Sell Agreements?

‍Yes. Buy-sell agreements often require immediate capital to purchase the shares of a departing or deceased partner. A key person insurance policy with built-up cash value provides readily available funds. This helps the business avoid forced sales of assets or high-interest loans, preserving both the firm’s ownership structure and long-term financial stability.

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How Can a Business Become Its Own Bank with Policy Loans?

When borrowing against a life policy’s accumulated cash value, you effectively lend money to yourself. The insurer uses the policy’s cash value as collateral and offers more flexible repayment terms than most traditional lenders. In many jurisdictions, these policy loans are not treated as taxable events, potentially yielding tax advantages (check local regulations).

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Are There Tax Benefits to Using Cash Value Life Insurance for Business Needs?

In many cases, yes. Policies like indexed universal life often allow tax-deferred growth on the cash value portion. Loans or withdrawals against that cash value can sometimes avoid immediate taxation, depending on local rules. Always consult a tax professional for advice tailored to your region.

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How Does Key Person (Key Man) Insurance Differ from Regular Life Insurance?

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Key person insurance covers an employee, owner, or executive whose sudden loss would seriously impact operations. Although the concept is similar to standard life insurance, a key person policy is owned and funded by the business. The payout mitigates losses, funds buy-sell agreements, and stabilises operations during ownership transitions.

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Can Cash Value Life Insurance Improve My Company’s Creditworthiness?

Yes. Lenders often consider a policy’s cash value a liquid asset that can be used as collateral. This lowers their risk and may lead to more favorable loan terms, reduced interest rates, or expedited underwriting. In essence, having a robust policy can enhance your company’s overall credit profile.

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What Role Does Cash Value Life Insurance Play in Executive Retirement Plans?

Cash value life insurance can form part of a comprehensive retention and compensation strategy. The accumulated funds can be used for deferred compensation, to top up pension schemes, or to reward key executives. In some scenarios, the policy may be transferred to the executive upon retirement, helping reinforce long-term loyalty and stability.

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How Does Cash Value Life Insurance Diversify My Company’s Assets?

Unlike traditional investments that track market fluctuations (e.g., stocks, bonds, or real estate), certain cash value policies—especially indexed universal life—offer growth tied to market indices but with guaranteed principal protection. This creates a non-correlated asset that offsets volatility from core operations and can strengthen the company’s balance sheet over time.

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Is Cash Value Life Insurance Customisable for Changing Business Needs?

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Absolutely. Policyholders can adjust premiums, coverage amounts, and even change the insured individual if a key person leaves. This adaptability means the policy can align with evolving requirements, such as restructuring, a change in ownership, or providing gratuity payments.

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Who Can Benefit Most from Cash Value Life Insurance?

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Cash value life insurance benefits any business reliant on crucial individuals or seeking alternative financing solutions. Companies focused on maintaining business continuity, protecting shareholder value, improving liquidity, or offering competitive executive benefits will find these policies especially valuable. They can also be a strategic tool for succession planning and mergers and acquisitions.

Final Note: Every business has unique liquidity and protection needs. If you’re considering incorporating a cash value life insurance policy into your strategic plan, consult a qualified financial, legal, or tax professional to customise coverage and ensure it aligns with your long-term business goals.

Disclaimer

This article is authored by Carlton Crabbe, Chief Executive Officer of Capital for Life, a specialist indexed universal life insurance broker. The information provided in this article is for educational and informational purposes only and should not be construed as financial or investment advice. While the author possesses expertise in the subject matter, readers are advised to consult a qualified financial advisor before making investment decisions or purchasing life insurance products.