Business Valuations to Support Life Insurance Coverage

We were recently contacted by the Inspection Department of an independent service provider to the Canadian life and health insurance industry with respect to one of our clients.  They were gathering information to assist in the underwriting process and wanted independent evidence supporting the client’s claim as to the value of the business as part of their inspection process.  Our client asked us to provide a copy of the independent business valuation we had prepared for purposes of their estate planning and life insurance.  

We have been providing independent business valuations to help business owners determine an appropriate amount of coverage for many years.  This was the first time, however, that we were contacted by a representative of the insurance company.  It may be that independent business valuations are becoming a more formal part of the underwriting process.

Life insurance is often used for income replacement or to alleviate the burden of estate and probate taxes upon death.  However, when business owners use life insurance to fund a buyout or redemption of the shares of a deceased shareholder it is important to ensure that the death benefit will be adequate to:

1. Fund the buyout or redemption of the deceased shareholder’s shares (Buy/Sell Insurance); and
2. Ensure the continued survival of the business upon the loss of what may be a key person in the business (Key Person Insurance).

As a result, the life insurance coverage should at least cover the current value of the business and many business owners grossly overestimate or underestimate the value of their business.  An independent business valuation provides business owners with third party evidence for ensuring adequate life insurance coverage.  This in turn provides the shareholders with peace of mind that their families and their businesses are sufficiently protected.  

An independent business valuation is also helpful to the insurance advisor as it will help:

1. Manage and control the process in creating the application file - insurance companies and their risk advisors are increasingly requiring support for the amount of coverage requested; and
2. Solidify trust and cultivate the relationship with the client - providing the insured with third party evidence regarding the value of their business eliminates any pre-conceived notions the client may have with respect to being over sold or under estimated as far as coverage.  

The business valuation should also be updated periodically as the adequacy of the life insurance coverage should be reviewed in light of any growth or other changes to the business over the prior years.  Ideally, this process should be agreed to and formalized in the company’s shareholders agreement, which for many business owners, may not exist or may not have been updated for many years.

Life insurance is an integral part of estate and contingency planning for business owners.  If you are in the process of obtaining life insurance or reviewing your current coverage, contact us at jason@vspltd.ca or www.vspltd.ca to assist with your business valuation needs.