2 While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.DI Retirement Security is issued as a non-cancelable, guaranteed renewable, individual disability income insurance policy. It is not a pension or retirement program or a substitute for such a program. DI Retirement Security is not available for government employees, individuals with Group LTD coverage that include a “retirement supplement,” or anyone who is over insured based on Principal Life’s current Issue an Participation guidelines. It may not be available or the benefit amount may be reduced for certain occupations if there is existing DI coverage with lifetime benefits. Additional underwriting guidelines may apply. DI Retirement Security is not available in CA.Policy rider descriptions are not intended to cover all restrictions, conditions or limitations. Refer to rider for full details. Riders are subject to state availability. Rider may be subject to an additional charge.| DI 2296
3 Life is Full of Risks Odds for Risk Covered by Insurance 1 out of 5 that your client’s auto will be damaged in an accident1 out of 21that your client will have a disabling accident1 out of 96that your client will have a fire1 out of 114that they will dieLife is full of risks but most clients do not realize the risk of disability is so great. Just look at the odds of what could happen during the course of one year.The odds are 1 out of 5 that your car will be damaged in an accident…1 out of 21 that you will have a disabling accident…1 out of 96 that you will have a fire…and1 out of 114 that you will die.Source: Field Guide 2001, National Safety Council, World AlmanacSource: Field Guide 2001, National Safety Council, World Almanac
4 Income ProtectionExisting clients with life changes (baby, newly married/divorced, etc)New clients just starting out in their careerOffer = Individual Disability Income insuranceHave you given thought to protecting your client’s most valuable asset?-4-
5 Individual Disability Income Insurance Objective: To cover income in the event of a disability.Benefits: Helps insure an individual can:Maintain current lifestyle without draining savings or business profits.Continue saving for retirement/future dreams.Provide for his/her family.
6 Did you know that nearly half of the one million Americans who filed for bankruptcy protection in 1999 did so after being sidelined by an unexpected illness or injury?(Read Slide) Without financial security a disability can have a major impact in your clients current day-to-day living and to any plans they have made for retirement.Source: New York Post, April 13, 2000, “There’s No Insuring You Won’t Go Bankrupt.”
7 Is There Really a Need?“American workers (at firms with ,000 employees) continue to live in a state of worry about their financial security.”**According to results of he third quarter 2004 Principal Financial Well-Being IndexSM. The Principal Financial Well-Being Index is a quarterly study that identifies and tracks trends in consumer financial well-being, retirement planning, employee benefits and workplace trends. It is conducted by Harris Interactive and commissioned by the Principal Financial Group®, the nation’s 401(k) leader.(Read slide)In particular, retirement insecurity ranked high on the list of concerns:66% of employees over age 55 say their standard of living will decline in retirement.*71% do not have a plan for transitioning retirement savings into a steady income stream in retirement.*In addition to helping your clients ensure their financial security with traditional individual disability income insurance, now you can help them protect their retirement plans.
8 Why Disability Coverage? Over their careers, workers are three and a half times more likely to be injured and need disability coverage then they are to die and need life insurance.(Source: Health Insurance Association of America, 2000)Why plan ahead for a Disability? Over their careers, workers are three and a half times more likely to be injured and need disability coverage then they are to die and need life insurance. In addition, most people have savings to cover less than six months of expenses. (Source: Business Almanac, 1997) Now add in their concerns surrounding their retirement. Clients are concerned about not having enough income to support them through out retirement, questionable Social Security benefits, raising cost of health care and prescription drugs and you may also find a gap in their disability coverage. Ailments that use to cause death are now treatable. In the last 20 years, deaths due to cancer, heart attack and stroke have gone down significantly, but disabilities due to those same three are up dramatically.
9 Income is the Financial Foundation When your client’s fail to protect their income, their dreams for a comfortable retirement, college education for the kids, or passing on assets may not become a reality. Income is the foundation of your client’s successful financial strategy. Helping them understand the need to protect their income falls on you. This presentation is to help you understand and overcome some of the most common objections that your client may have when it comes to discussing individual disability income insurance.49.7 million Americans were classified as disabled in the 2000 Census. Source: “Census 2000 Brief,” U.S. Bureau of the Census, March 2003About 1 in 7 people can expect to be disabled for five or more years before retirement. Source: The New York Times, February 2000Disability causes nearly 50% of all mortgage foreclosures, compared to 2% caused by death. Source: Health Affairs, The Policy Journal of the Health Sphere, February 2, 2005
10 Significant Market Potential 76 MillionPenetrationEstimated Individual disability market-size and penetration.Market Size252015Millions of PeoplePenetration is minimal.16 Million1011 Million5And as you can see, the market for disability insurance is underserved. (Discuss Slide) There is a significant market potential for individual disability insurance.ProfessionalsManagersMiddle IncomeSource: Response Analysis Corporation, 1994
12 Multi-Life TrendsSmall- to mid-sized businesses are the most popular market*Most insurance companies target the under $150,000 employee income market***Opportunities for Value Growth in the Disability Market presentation, Mercer Management Consulting, February 2000**LIMRA MarketScan: Multilife Executive Disability Products, 2001
13 Voluntary TrendsEmployers are using voluntary programs to help control benefit costs while still offering a comprehensive package*Voluntary products are helping attract and retain quality employees in a tight labor market**Opportunities for Value Growth in the Disability Market presentation, Mercer Management Consulting, February 2000
14 Large Case Multi-life Offerings (GSI/SI) Case design and consultation through the DI Solutions CenterCustomized employee proposalsPre-filled applicationsEnrollment and re-enrollment assistanceAdministrative supportMarketing tools, such as:Employer Pitch KitsEmployee Pitch KitsCustomized Enrollment CommunicationsWe can help you:Assess your disability insurance needEvaluate your current programDetermine appropriate program designReview the cost benefit analysisDetermine tax consequencesImplement your program
15 Simplified Multi-Life Case StudySimplified Multi-LifeMarket: Commercial and industrial heating industryBackground: Employer offered group long-term disability insurance, but had several key executives that had an income protection gapSolution: Carved out executives and offered Voluntary Simplified Multi-Life during 1:1 enrollmentsResults: Sale resulted in $8,000 in annualized premium, plus the potential to offer additional productsCommission Potential$4,000 First Year Commission*$3,600Renewal Commission Potential Over Next 10 Years*Read slide* Assuming 50% commission, 100% persistency and no annual coverage increases.
16 What Companies to Approach Employers who are committed to employeesSolid companies providing comprehensive benefit packagesCompanies with existing Group LTD – compete with other carrier’s ratesGroup LTD program designs with replacement ratios of 40 to 60+ percentGroup LTD monthly benefits beginning at $4,000 per monthEmployee replacement income that does not include bonus and commissions
17 What Companies to Approach Average employee under age 501099 employees not eligible for Group LTD25 or more key employees earning $35K+ or 10 to 12 employees earning $100K+Key employees earning more than $60K
18 Retirement Income 401(k) Plans Mutual Funds IRAs Clients maxed out on Individual DI insuranceOffer = DI Retirement SecurityHow many of you are helping clients generate assets for retirement? Have you thought about protecting the ability to continue saving for retirement from a disability?Note: need to make sure protected with base-level of DI.-18-
19 Protecting Retirement Savings Your clients have probably started saving for retirement. What would happen if they suffered a disabling illness or injury and could not work?At all income levels, an extended disability can have a major impact on retirement assets. Your clients have started saving for retirement, but have you discussed what would happen to that retirement savings if they became disabled? You have helped them protect their income with individual DI coverage, why not use additional coverage to cover retirement savings?How would they continue to contribute to their retirement if they are no longer getting a paycheck? Why should you include discussing the need to protect this savings? What tax issues are involved? What are some commonly asked questions? These are some of the questions that we will be discussing today. Let’s start with how this coverage is different...
20 Roughly $2 trillion of Americans' retirement savings have been lost over the past 15 months.* Many of your clients may be paying closer attention to their retirement plans due to recent market volatility. As you help them review their current retirement goals and plans, talk to them about DI Retirement Security.Read slide* Orszag, Peter R. "The Effects of Recent Turmoil in Financial Markets on Retirement Security." Before the Committee on Education and Labor-U.S. House of Representatives. Washington, D.C., Oct. 7, 2008.
21 Impact of a permanent disability on retirement savings at age 40 Retirement AssetsHow much of an impact can a total disability have on your client? If your client were contributing $2,000 a month into their retirement and they were disabled at age 40 and remained disabled until the end of an age 65 benefit period, without this protection, he or she could lose approximately $1.8 million in retirement assets. (Explain the chart: how new contributions have stopped but current contributions will continue to be invested and grow.)AgeAssumptions: $2,000/month contributions beginning at age 30, 8% rate of return and age 65 retirement. Consequences of disability at age 40, without retirement savings protection.
22 Impact of a 5-Year disability on retirement savings Retirement AssetsEven if your client’s disability is not a long disability, it still has a great impact on their retirement contributions. You client could lose one million in their retirement savings with just a 5 year disability. So this coverage is important even for a shorter disability.Not only will a disability impact their ability to contribute to a qualified retirement plan, they will also not be contributing to Social Security while disabled.So what is the solution?AgeAssumptions: $3,000/month contributions beginning at age 30, 8% rate of return and age 65 retirement. Consequences of a five-year disability at age 40, without retirement savings protection.
23 Protect retirement savings with a disability income insurance policy Solution…Protect retirement savingswith a disability incomeinsurance policy
24 Traditional individual disability income (DI) insurance policy: Coverage OverviewTraditional individual disability income (DI) insurance policy:Pays a monthly benefit to help you cover personal living expenses (mortgage, utilities, etc.) during a disabilityThe monthly benefit your client receives from a traditional individual disability income policy would be used to help them cover personal living expenses like the mortgage, utilities, car payment, etc. during a disability.Traditional DI can help eliminate the need for them to tap into their retirement savings.How can a disability impact future retirement savings? Lets take a look.
25 How Does It Work?A policy to protect your client’s retirement savings should provide upon disability:Pay a monthly benefitBenefits should be paid in addition to any existing DI coveragePortableWith a DI policy that protects your client’s retirement savings, usually the money can be paid to an irrevocable trust which will invest the funds as directed. The type of retirement savings protection coverage your client selects, should be in addition to the maximum traditional DI coverage for which they are eligible. The retirement protection coverage you should look for should be portable so if your client were to leave their current employer, this coverage would go with them and still be in place.
26 How Does It Work? Insurance Company Insured Irrevocable Trust Before disability – insured pays DI insurance premiumsInsurance CompanyInsuredUpon disability – company pays DI insurance benefits which the Trust investsUpon reachingthe benefit period – insured may begin receiving Trust assets per the terms of their Trust AgreementMost retirement protection coverage follows this path. Before disability the insured pays their DI insurance premiums to the insurance company. Upon disability the company will then pay the DI benefit to the Trust which will set up an Irrevocable Trust and invest the money for the client. Upon reaching the end of the benefit period the insured may begin receiving Trust assets per the terms of their trust agreement.Irrevocable Trust
27 Business Protection Stay Bonus Key Person Employee Stock Ownership PlanOffer = Overhead Expense insuranceHow many of you are helping clients with protecting their business? Business owners need to protect the integrity of their business for not only daily operational reasons, but also for the promise it holds for their future retirement income.Business owners need to protect the integrity of their businesses in order to:Maintain business operations in the event of the loss of a key employeeProtect their future retirement incomePreserve the value of their business until they choose to exitBetter facilitate a transfer to family members, key employees, other owners or third parties upon their exitBusiness protection is the process of implementing strategies to preserve, protect and promote the value of a business. Utilizing various techniques available, as well as our expertise, you can help protect your client's business.-27-
28 Overhead Expense Insurance Objective: to reimburse a business owner for covered business expenses incurred during his/her disability.Benefits: Helps insure a business can remain open and the owner can either:Return to financially sound business; orSell a business that has not depreciated because of the owner’s disability.Target Market: Business owners and self-employed individuals; business with 8 or less owners for fee-for-service businesses and businesses with 4 or less owners for other business typesProduct Design: Have fully underwritten and Simplified OE programs available.Overhead expense covers the short term need, the disabled client can cover business expenses for an agregate benefit factor of up to 24 in most cases. The objective the coverage is to keep the business financially viable in case the owner can not return to work and would be forced to sell the business or envoke the buyout plan that has been established. It is basically a way to ensure the value of the business.
29 Motivating Questions for OE insurance 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?These are some questions to get your business owner clients thinking about overhead expense protection. (read questions) We will go into more detail to help you respond to possible answers you may receive from these questions.
30 Exit Planning Buy-Sell Agreements funded with Life Insurance Offer = Disability Buy-Out InsuranceHow many of you are helping clients with exit planning strategies? Have you thought about funding buy-sell agreements with disability insurance?Minimizing the impact of taxes and expenses on an estate and/or business at death is a major concern for many individuals. They want to preserve what often has taken a lifetime to accumulate.Business owners want to exit their business when they want and on their own terms. In addition to the owner's unique goals and expectations, taxes, legislation and business structure all influence an effective business exit strategy.Exit planning is a customized process of setting business exit goals and implementing targeted strategies to achieve them. It can help the owner:Set an exit timelineDetermine the value of the businessIdentify whom the business will be transferred toGet the most for their business - regardless of the circumstances under which they leave-30-
31 Disability Buy-Out Insurance Objective: 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.Product Design: Have fully underwritten and Simplified DBO programs available.*Clients should contact their tax advisor for details.
32 Audiences for DBO insurance Small to medium-sized businesses with:10 or fewer owners*At least 10% ownershipA buy-sell agreementOwners that depend on each other to keep the business running smoothly.Target Market – Law firms, CPA firms, physician practices, computer/software companies, distribution companies, engineering companies and architectural firms.*May depend on occupation class.
33 10 Questions You Must AskAre all current owners party to the buy-sell agreement?Have the owners reviewed the business valuation formula recently?Does the agreement state that shareholders will set the buy-sell price at an annual meeting?Is the agreement funded with both life and disability buy-out insurance?Does the agreement address how life insurance is treated in valuing the business?Here are questions to get clients thinking about updating their existing buy-sell agreement and/or insurance funding. This list is not comprehensive and is for discussion purposes only. It is not intended as a substitute for a review by the client’s legal advisor. Check to see if any interest in the business has been acquired by any individuals whohave not signed the buy-sell agreement.1. Are all current owners party to the buy-sell agreement? Check to see if any interest in the business has been acquired by any individuals who have not signed the buy-sell agreement.2. Have the owners reviewed the business valuation formula recently? If so, do they still think it makes sense? Many agreements use book value, which rarelyprovides a realistic, fair price and is particularly problematic from a tax standpoint in the case of family businesses. Consult a CPA or other valuation expert.3. Does the agreement state that shareholders will set the buy-sell price at an annual meeting? If so, when was such a meeting last held? Are the owners comfortable with the price? Does the agreement contain a back up provision in case the shareholders have not set a price recently?4. Is the agreement funded with both life and disability buy-out insurance? If so, is additional coverage required? Do they need to convert term to permanent insurance?5. Does the agreement address how life insurance is treated in valuing the business? Generally, an entity purchase plan should exclude death benefits from the purchase price. (Policy cash values are normally considered in valuing a business.) A cross purchase agreement stating that the minimum value is equal to the life insurance death benefit can create problems.
34 10 Questions You Must AskIf life and disability insurance have been purchased, has policy ownership been coordinated with the buy-sell agreement?Does the definition of disability in the buy-sell agreement match or refer to the definition of disability in the disability buy-out policy?Has the business entity type changed since the agreement was drafted?When did the client’s attorney last review the agreement?Have the business owners considered the estate planning implications of the buy-sell agreement?6. If life and disability insurance have been purchased, has policy ownership been coordinated with the buy-sell agreement? For cross purchase, policies should be cross owned. For entity purchase, the entity should own the policies. Tax issues may arise if the policy owner is not also the beneficiary. Before transferring policies or changing beneficiaries, clients should consult their tax and legal advisor.7. Does the definition of disability in the buy-sell agreement match or refer to the definition of disability in the disability buy-out policy? Coordinating the definitions can ensure that insurance benefits will be available when a purchase obligation is triggered by the buy-sell agreement.8. Has the business entity type changed since the agreement was drafted? Making or terminating an S election or converting to an LLC impacts which type of buy-sellagreement is appropriate.9. When did the client’s attorney last review the agreement? The agreement should be reviewed any time changes in ownership, entity type or tax laws occur, or upon the acquisition/creation of a new line of business. In any case, the client’s attorney should periodically review the agreement.10. Have the business owners considered the estate planning implications of the buy-sell agreement? A buy-sell agreement impacts what assets are included in the taxable estate, the value of the assets included and who ultimately receives assets. Buy-sell agreements should be coordinated with the estate planning documents of the owners to help ensure taxes are minimized and estate distribution goals are achieved.
35 Selling Multiple Products Case StudyMarket: Psychologist OfficeBackground: Client wanted to protect his income and business in the event of a disabilitySolution: Multi-Life Individual Disability Income Insurance, Overhead Expense Insurance and DI Retirement SecurityProposed adding other staff to get Multi-Life discount for coveragesResults: Sale resulted in $7,884 in annualized premium for:Three Individual Disability Income insurance policiesDI Retirement policyOverhead Expense policyCommission Potential$3,942 First Year Commission*$3,548Renewal Commission Potential Over Next 10 Years*Highlighted case: Multi-Life Individual Disability Income (DI) insurance, DI Retirement Security and Overhead Expense insuranceWhat was the problem/need the client had? The client, a psychiatrist who owns his own practice and has a family, realized a lot of people were counting on his ability to work and earn an income.What was the recommended solution? Producer proposed that the client purchase the following products to help protect his family and business:Individual Disability Income (DI) insuranceDI Retirement SecurityOverhead Expense (OE) insurance The client agreed to the coverages, however, the annual premium price was more than he wanted to spend (all three coverages would cost $6, annually). The producer used the Multi-Life Individual Disability insurance discount to help reduce the cost of those policies and close the sale. Randy proposed covering two employees in the client's office with Individual DI insurance policies. This created the necessary 3+ lives with a common employer needed for receiving the 20% Multi-Life discount on all the coverages. The client agreed and even purchased the policies for his employees.Although he spent more than originally intended overall, he was able to enhance the benefit package for employees, helping retain them at his practice. With the Multi-Life discount, he saved $ on the policies he purchased to help protect his income, business and ability to save for retirement and he saved $1, on the overall plan. Compensation potential - $3,942 of first-year premium with potential for an additional $3,548 in renewal commissions over the next ten years (if the polices stay inforce). Plus, if Randy wrote additional Individual Disability insurance business with Principal Life, he could also earn Quality Business and Quality Producer Bonuses. * Assuming 50% commission, 100% persistency and no annual coverage increases.