Business Planning With Life and Disability Insurance

Transcription

1 Business Planning With Life and Disability Insurance Speaker: Eddie Sussmann, Leading Edge Disability Center For producer information and education only. Not for use with the general public.

2 Why Leading Edge Disability Center? Benefits of working with Leading Edge: We offer complete back office support Free Training Sales Ideas Our marketing concept is to find niche products that will fit your client s needs and lifestyle. We do the shopping for you. This will enable you to do more selling. We are truly a "one stop shop.

3 Why Leading Edge Disability Center? Our products and services: Disability Insurance Life Insurance Final Expense Critical Illness Insurance Medicare Supplements Medicare Advantage Long Term Care Annuities Pension Planning Guaranteed Standard Issue plans Executive/Business Owner White Collar Professionals Blue & Gray Collar Simplified Underwriting Substandard Coverage Return of Premium

4 Online quotes Presentations Video training Sales Ideas Agent guides Client brochures Applications Contracting

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6 Training Videos: DisabilityCenter.com

7 DisabilityCenter.com Training videos:

8 LeadingEdgeFinancial.net DisabilityCenter.com Quote request sheet: What info is Needed for a DI quote

9 DI Opportunity In DI carriers Today - 26 (13 captive) carriers offer disability insurance

10 DI Opportunity Go where the competition is not - we can show you how to thrive selling Disability Insurance.

11 Why DI? In this introduction, we ll discuss: Why clients need it Most valuable asset DI Statistics Sales Ideas

12 Why DI? Your ability to earn an income is the greatest asset you will ever have We all need to protect our ability to earn a paycheck

13 What is your most valuable asset?

14 Protect Your Most Valuable Asset

15 We all take risks every single day: Waking up/getting out of bed Driving to work Fire in home Dying Illness or Injury We often protect ourselves from these risks: Health Insurance Auto Insurance Fire/Homeowners Insurance Life Insurance What about the risk of becoming disabled?

16 Your most valuable asset is probably underinsured. You insure.. Your home Your car But, what about your income?

17 Odds For Different Risks Covered By Insurance 1 in 96 1 in 5 Life 1 in in 21 DI Sources: Fire, Auto, DI National Safety Council, 2005 Death World Almanac, 2005

18 DI Statistics The chart below illustrates that an individual s chances of disability are 2 to 3 times greater than death during their working years (Commissioner's Individual Disability Table A. 1985)

19 Money Machine If you had a machine that would give you $275 everyday, what would you do? You do have such a machine it s you! Make sure you protect your money machine if it breaks down. You can help replace the income it is no longer making.

20 The Goose that laid the golden eggs Did you forget to insure ME??? If you had a goose that laid golden eggs, which would you insure? We all insure our home, our cars, belongings all these are the eggs, but how about the goose = your ability to earn an income?

21 Two job story Which job would you take??? Healthy Sick or hurt Job A $100, Job B $99,000 $60,000

22 I can depend on Social Security to pay disability benefits to keep me and my family out of financial trouble, right? Not really

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24 Other Financial Means How would you replace your lost income? Savings? One year of disability can wipe out 10 years of savings The Life Underwriting Training Council. Fundamentals of Financial Services Course. Volume 6, 1997 edition. Borrow? What bank would lend you money if you were disabled and unemployed? Social Security? To qualify, your disability must be expected to last at least 12 months or end in death, in addition to other requirements You must also be unable to engage in ANY occupation. Other Income? Could you maintain your standard of living without placing additional strain on you and your family?

25 The Good News and Bad News Good News People are living longer. Bad News Diseases that used to cause death are now leaving people disabled.

26 Disability On the Rise 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% 70% 44% 36% 36% 55% -73% Hypertension -29% -48% -27% -32% Heart Diabetes Diseases Cerebrovascular All Four Death Disability Disability Death Source: National Center for Health Statistics

27 Likelihood of becoming disabled Every 4 seconds someone is disabled at home. Every 9 seconds someone is disabled at work. Every 13 seconds someone is disabled in a motor vehicle. Source: National Safety Council, Injury Facts 2004 Edition (NSC estimates)

28 Business Planning with DI

29 Business Owners May Face Four Types of Disability Risks Keeping a roof over their head - DI Keeping the business doors open - BOE Keeping the business running with the loss of a key employee Key Person DI Keeping the investment intact DBO

30 Consider the Likelihood... Chances of Disability Lasting 3 Months or Longer (before age 65) Age 1 Owner 2 Owners 3 Owners % 70.0% 83.6% % 64.5% 78.8% % 54.8% 69.6% % 35.4% 48.1% Based on Commissioner s Individual Disability Table A Equally Weighted, All Occupation Classes, Unisex.

31 Overhead Expense (OE) insurance Have your business owner clients planned for the future of their business?

32 Keeping the Business Open with Business Overhead Expense Insurance For producer information and education only. Not for use with the general public.

33 Why Overhead Expense? Objective The objective of OE insurance is to reimburse a business owner for covered business expenses incurred during his/her disability. Benefits Helps insure business value so the owner can: return to financially sound business or sell the business that has not depreciated because of the owner s disability.

34 Motivating Questions for OE Can the business maintain a reasonable level of income during the owner s disability? How would your client continue to pay business expenses when he/she can t generate revenue because of a disability? Where would this money come from? Would the business have to turn clients away? Would they be able to keep the doors open?

35 How Does OE Insurance Work The disabled client is reimbursed for expenses paid. Premiums are tax deductible (Rev. Rul , C.B. 11) Benefits are reportable as income (Rev. Rul , C.B. 11). Although the benefits are taxable as income, the actual business expenses are deductible.

36 Who needs OE Insurance Business owners and self-employed professionals face a dual problem: protecting their families and their businesses from the financial burden of disability. Disability income insurance helps protect the family, but what about the needs of the business? How will that be protected?

37 Alternatives to not having OE Insurance... Use accounts receivable to pay expenses Partners will cover share of business expenses Employees can run the business in case of disability Use personal disability income benefits or draw from personal savings

38 More Alternatives to OE Insurance Hire a professional replacement Borrow money Close the business/office temporarily during the business owner s disability Sell business If these are not viable options for your business owner clients, then they need OE insurance.

39 Examples of Covered Overhead Expenses Lease or mortgage payments Utilities Employee salaries and benefits (excluding owner s salary) Payments for leasing or purchasing furniture and equipment Accounting, billing, and collection fees

40 Covered Overhead Expenses, continued... Janitorial, security, and maintenance Premiums for malpractice, property, and liability insurance Professional trade dues and subscriptions

41 Covered Overhead Expenses, continued... Business-related loans A Business loan protection rider reimburses the owner for the covered business-related loan obligation during his or her total disability. Additional cost rider Reimburses policy owner 1 for covered business-loan obligations Loan obligations typically covered 2 : Term, Variable Rate, Commercial Mortgage, Lease Financing Payments continue during Your Continuous Disability but not beyond the business loan protection date Benefit is separate from reimbursements paid for other expenses covered by the OE insurance policy 1 Unless assigned to the financial institution holding the financial obligation. 2 Types of loans not covered: line of credit, balloon, credit card, revolving line of credit, interest only.

42 Example of Overhead Expenses - Not Covered Salary and benefits for: The owner(s) Any person sharing business expenses with the insured Any member of the insured's profession Any individual hired to perform the insured s duties Any person responsible for the generation of income for the business. Any member of the insured s immediate family, who was not a full-time employee prior to disability

43 Overhead Expenses - Not Covered, continued... The cost of goods, merchandise, products, or services Depreciation Moving Expense Parking fees

44 Designing Overhead Expense Maximum monthly benefit (up to $50,000 per month) Elimination period (30, 60, 90 days) Coordinate with Disability Buy-Out (DBO) Maximum aggregate benefit factor If the client has a DBO policy with a 365 day elimination period then he/she would want a 12 month benefit factor on the OE policy. If he/she were to select a 24 month benefit factor for the OE policy would stop paying at 12 months because the buy-out process would start and the owner is no longer responsible for expenses.

45 Overhead Expense Planning Business Revenue $ PROFIT Individual DI Policy EXPEN$E$ Overhead Expense Policy

46 Keep the Business Running with Key Person Replacement Insurance For producer information and education only. Not for use with the general public.

47 Objective Key Person Replacement insurance It is designed to protect small- to medium-sized businesses from the loss of employees critical to the success of the business due to a total disability. Benefits Demonstrates financial stability Expense management assistance Benefits are generally received income tax free

48 Key Person Replacement insurance Who is a key person? Typically someone who: Is critical to the livelihood of the business May or may not be one of the owners Is responsible for management decisions Is highly paid Has a significant impact on sales May have a special rapport with customers or creditors

49 The need for Key Person DI Business Owners feel the effects of a disabled Key Person with: Loss of management skill and experience Disruption of the business when clients withhold or delay their business until the impact of the employee s disability is known Difficulties when cautious creditors wait until they can assess how the disability affects the business Increased expenses associated with hiring and training a key employee s replacement

50 Key Person Replacement insurance How it Works 1. The employer pays the premium and is the owner of the policy insuring the key employee in the event of a Total Disability. 2. If the key employee becomes Totally Disabled, the employer receives benefits, generally tax-free.

51 Key Person DI Common uses Benefits* can be used at the discretion of the employer, but common uses include: Bridging the revenue gap Hiring and training a replacement Filling temporary staffing needs *Benefits cannot be assigned to the key employee.

52 Keeping the Investment Intact with Disability Buy-Out For producer information and education only. Not for use with the general public.

53 Business Planning with Life and DBO What if I died last night? Or What if I became disabled? As the owner of a family business or closely held corporation, how would your client answer these questions: Who will run my business? How will my family receive income? How will my creditors be paid? What is my business worth? What will my partners want? Will my interest be sold? Who will buy my interest? Do they have cash? Are my affairs in order?

54 Buy-Sell Agreements HOW TO PROTECT A BUSINESS FROM DISASTER WHEN AN OWNER LEAVES In a small business, the owner is not the only stakeholder. Co-owners, employees and clients may be affected when an owner retires, becomes disabled, or dies. Planning ensures that the business that has been created can continue. A buy-sell agreement a formal agreement that arranges for the purchase of the business upon the occurrence of certain events - is often a good strategy.

55 Why Disability Buy-Out Insurance? Objective The objective of DBO insurance is to reimburse money paid for the purchase of a disabled owner s interest in the business in the event of a long-term disability. Benefits Benefits are income tax-free - the disabled owner is taxed only on the gain from the sale of the business* Provides a funding solution for the business

56 The DBO Opportunity Most businesses have not set up proper plans Many of the written buy-sell agreements are not funded When the buy-sell agreements are funded, most are only funded for death purposes

57 Motivating Questions for DBO Insurance If your business owner client became disabled and was unable to work, would the other active business owners buy his/her business interest? At what price would they be interested in buying? At what price would your disabled client be interested in selling? Would his/her partners have the funds available to buy your client s share?

58 Who needs DBO Insurance Small businesses of five or fewer owners Usually at least 10% ownership to be considered Need to have a plan for succession Have considered funding with insurance Owners that depend on each other to keep the business running smoothly Excellent Prospects Law, CPA and Architectural firms Physician practice Computer/Software, Distribution, Engineering companies

59 How Does DBO Insurance Work Non-disabled client(s) are reimbursed for expenses paid during the buy-out process Premiums are non-deductible (IRC 265; Rev. Rul , C.B. 105) Benefits are received income tax-free (IRC 104(a)(3); Rev. Rul , C.B. 105) The disabled owner is taxed only on the gain from the sale of the business. The gain may be considered an installment sale if at least one payment is to be received after the close of the tax year in which the sale was made. Clients should contact their tax advisor for details.

60 Alternatives to not having DBO Insurance Business cash flow Sinking fund accumulations Loans from financial institutions

61 DBO Advantages to the Disabled Business Owner Creates an automatic market by guaranteeing a definite and fair price and a buyer for the business interest Provides money which may be needed to pay medical bills and living costs Assures that his or her financial future is no longer contingent upon the strength of the business

62 DBO Advantages to the Active Business Owners Assures they can buy out the disabled owner at a predetermined price and pre-arranged time after disability strikes Maintains business continuity and credibilitywhich are concerns of customers, creditors and employees

63 Advantages to the Active Business Owners, continued... Avoids involving the disabled owner and his/her family in the management of the business Competitors cannot purchase the disabled owner s business interest in the firm and force out the active owners

64 Common Methods to Calculate Business Value For Personal Service Business 2 times income plus the profit of the business For General Business Book value plus capitalization of excess earnings

65 Date to Establish Value The date the owner first becomes disabled or The trigger date of the buy-sell agreement

66 Buy-Sell Considerations Method of payment When is the first payment due? How should it be paid? And When? Lump sum payment Monthly installments Combination of both

67 Lump Sum Benefits Tax ramifications to the business and owners should be considered* Premium structure is most expensive because the insurance company is committed to paying 100% of the proceeds in one payment. *Clients should contact their tax advisor for details. For Producer Education and Training Purposes Only

68 Monthly Benefit Tax ramifications for the insured - may be lower taxes with a 24, 36, or 60 month payout* Lower premium results because the insurance company retains the assets longer and may not have to pay out the entire benefit *Clients should contact their tax advisor for details. For Producer Education and Training Purposes Only

69 Common Additional Features Legal and Accounting Fee Benefit May reimburse up to $3,000 of legal and accounting fees to exercise the agreement Reduction of benefits at age 60 20% reduction through age 64 Future Insurability Allows the business to increase the value of the policy without medical insurability For Producer Education and Training Purposes Only

70 Best to use with multiple owners Buy-Sell Considerations Structure of the agreement Cross-purchase agreement Works best with two to three owners The insurance company reimburses the non-disabled owner(s) Receive step up in basis Entity purchase agreement The insurance company reimburses the corporate entity

71 Cross Purchase Agreement Each owner owns a policy on each of the other owners After disability, the non-disabled owner(s) purchase the disabled owner s share in accordance to the Buy-Sell Agreement and receives policy benefits (up to the maximum policy limit) as a reimbursement The non-disabled owner(s) then own the business, and the disabled owner has been paid the price agreed upon

72 How a Cross Purchase Agreement Works Business Owner A Buy-Sell Agreement Business Owner B Premium Premium Policy and Disability Benefits on Owner B Insurance Company Policy and Disability Benefits on Owner A

73 Advantages/Disadvantages of a Cross Purchase Agreement Advantages Policies are not available to creditors Non-disabled owners receive an increase in their basis Disadvantages If there are more than three owners, the number of policies needed may not be practical

74 Entity Purchase Agreement The business purchases and owns a buy-out policy on each owner After disability, the business purchases the interest of the disabled owner in accordance to the buy-sell agreement and receives policy benefits (up to the maximum policy limit) as a reimbursement The non-disabled owners then own the business, and the disabled owner has been paid the price agreed upon

75 How an Entity Purchase Agreement Works Business Owner A Business Owner B Buy-Sell Agreement Business Buy-Sell Agreement Premium Policy and Disability Benefits on Owners A and B Insurance Company

76 Advantages/Disadvantages of an Entity Purchase Agreement Advantages Only one policy per business owner is necessary Disadvantages Policies are open to claims by creditors The buy-out will not increase the healthy owner s basis

77 With Overhead Expense, Key Person Replacement and Disability Buy-Out insurance in place, you help your business owner clients minimize the disruption to their businesses if they or a key employee were to be taken out of the picture due to a disability. This allows you to help your clients keep and protect their business.

78 Thank You! Questions? Eddie Sussmann or Daniel Dragan