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1 Presented By: Lori Boggs Sales Manager MetLife Rich Van Liew Asst. Director Underwriting Asst. Director Underwriting Principal Life Disability Buy-Sell.

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Presentation on theme: "1 Presented By: Lori Boggs Sales Manager MetLife Rich Van Liew Asst. Director Underwriting Asst. Director Underwriting Principal Life Disability Buy-Sell."— Presentation transcript:

1 1 Presented By: Lori Boggs Sales Manager MetLife Rich Van Liew Asst. Director Underwriting Asst. Director Underwriting Principal Life Disability Buy-Sell Funding & Valuations

2 2 The risk of is 2 to 4 times greater than the risk of death during ones working years. Chance of a disability lasting 90 days or longer compared to chance of death before age 65. Weighted averages based on MetLife disability insurance sales applied to calculations from Milliman, Inc. on disability experience results for from the Individual Disability Experience Committee of the Society of Actuaries. The Risk of Disability Is High AgeMaleFemale to to to to to to to to to to to to to to to to to to 1

3 3 Risk of Disability Grows with Number of Owners The Chances of at Least One Person in a Group Becoming Disabled for 90 days or Longer Before Age 65 Number of People in a Group Weighted averages based on MetLife disability insurance sales applied to calculations from Milliman, Inc. on disability experience results for from the Individual Disability Experience Committee of the Society of Actuaries.Age %71%81% 4051%66%76% 5043%57%68%

4 4 Buy Sell Planning & Buy Sell Agreements

5 5 What Happens To The Business In The Event of an Owners Total Disability… The active business owner may: Not be able to pay the disabled owner an income and maintain the business Not have funds to buy-out the totally disabled owner Not want to share business decisions with the disabled owners family

6 6 The Need for Disability Buy-Sell Planning Protects business owners and their families by obligating active owners to buy out a disabled owner in the event of a disability Protects owners by providing the funding to purchase part or all of the business interest of a disabled owner Minimizes discord among owners by setting the price and terms of a sale in the event an owner becomes disabled Prevents unwanted transfers to parties that might be unqualified or contentious (Family Members, Competitors)

7 7 Buy-sell Agreements Buy-sell Agreements How the business will be valued at any future point in time (Purchase Price) Terms of ownership transfer and payment How long a total disability must last before a buy-out is triggered Should be equal to the policy Elimination Period How a total disability is to be defined or determined. Should match the definition of total disability from policy Minimizes surprises and disagreements when the unexpected happens by addressing:

8 8 Many businesses have not established proper plans? Many businesses have not established proper plans? Many Buy-Sell agreements are not funded? Many Buy-Sell agreements are not funded? When the buy-sell agreements are funded, most are only funded for death purposes? When the buy-sell agreements are funded, most are only funded for death purposes? Is your clients Buy-Sell Agreement fully funded? Did You Know?

9 9 Buy-Sell Agreements Current cash flow Establish a sinking fund Borrow the funds Disability Buy-Sell insurance Funding Alternatives

10 10 Funding Alternatives Cost to take from cash flow or sinking fund accumulations: Assumptions: $500,000 Business Value, 5 yr repayment schedule at 9% interest, 10% profit margin; 34% corporate tax bracket, 45 year old Business interest value $500,000 Tax bracket 34% Total cost $757,576 Sales needed to fund from cash flow $7,575,760

11 11 Funding Alternatives Cost to borrow: Assumptions: $500,000 Business Value, 5 yr repayment schedule at 9% interest, 10% profit margin; 34% corporate tax bracket, 45 year old Principal payments $500,000 Tax on non-deductible principal payments + 257,576 Gross profit needed for principal payments 757,576 Net interest payments + 81,014 Total payments needed for buy-out $838,950 Sales needed to fund repayments $8,385,900

12 12 Cost to pre-fund through Disability Buy-Sell insurance: Business interest value $500,000 Annual Premium 2,550 2,550 Maximum premiums payable $51,000 $51,000 Sales needed to pay insurance premiums $510,000 Assumptions: $500,000 Business Value, 5 yr repayment schedule with 365 day elimination period, resident of CO, 10% profit margin, 45 year old, non-smoker, male at a top occupation classification. Funding Alternatives

13 13 Business Overhead Policy Benefit period should equal the Buy Sell Policy Elimination Period. Match policy parameters to buy-sell agreement terms Benefit Amount (Purchase Price, Fairmarket Value) Elimination period Benefit Period (Lump Sum, Monthly Installments and Down Payment-combination of the two) Structure (Cross Purchase, Entity Purchase, Trustee Purchase) Rider (Future Insurability Option) Buy-Sell Insurance Policy Design

14 14 Business Valuations & Case Studies

15 15 Formulas for Business Valuations CPA valuation 2 times Salary + business profit + book value 150% of gross earnings + plus book value Professional services valuation 2 times Salary + business profit + book value Disability Insurance Underwriting - MetLife

16 16 Manufacturing/Construction Firm Valuation Book Value Assets – liabilities + retained earnings n n Capitalization of Earnings: Average after tax earnings times a reasonable multiplier low risk/high growth = high multiple (usually a factor of 4 to 7) high risk/low growth = low multiple (usually a factor of 2 to 4) n n Price/Earnings Method: Average after tax earnings + Owners Salaries – replacement salaries x reasonable multiplier (see above) Disability Insurance Underwriting - MetLife Formulas for Business Valuations

17 17 CPA Firm Case Study 2 equal owners salaries total: $1,000,000 $50,000 net profit $100,000 book value 2 employees 2xs Salary + Profit + Book Value $2,000, , ,000 $2,150,000 total business value Each owner is eligible for a benefit up to $1.1 million *Maximum Benefit Amount depends on payout method and elimination period Disability Insurance Underwriting Valuation - MetLife

18 18 4 equal owners 4 equal owners Company been in business for 6 years and is showing growth Company been in business for 6 years and is showing growth Book Value of $2,000,000 Book Value of $2,000, Profit of $ 150, Profit of $ 150, Profit of $ 250, Profit of $ 250, total Owners Salary of $400, total Owners Salary of $400,000 Construction Firm Case Study Price Earnings Method Average after tax earnings + Owners salaries – replacement salaries X a reasonable multiplier $200,000 + $400,000 x 3 $1,800,000 Business Value Capitalization of Earnings Method Average after tax earnings X Multiplier $200,000 x 3 $600,000 Business Value Book Value Method Assets – Liabilities + Retained Earnings = $2,000,000 Disability Insurance Underwriting Valuation - MetLife

19 19 Capitalization of Earnings + Book Value Capitalization of Earnings + Book Value 100% of officer compensation + business profit x Multiplier of 1-5* + Book Value 100% of officer compensation + business profit x Multiplier of 1-5* + Book Value *The capitalization factor (multiplier) is dependent on the industry as well as factors including years in business, net income, size of business and profitability. Disability Insurance Underwriting - Principal Formulas for Business Valuations

20 20 Physician Firm Case Study 2 equal owners 2 equal owners salaries total: $1,274,626 salaries total: $1,274, employees 20 employees $4.3 million gross sales $4.3 million gross sales $29,225 net profit $29,225 net profit $155,429 book value $155,429 book value Salary + Profit x 3 + Book Value $1,274, ,225 x ,429 $4,066,982 total business value Each owner is eligible for $1.5 million* *Maximum I&P for physicians Disability Insurance Underwriting Valuation - Principal

21 21 Manufacturing Firm Case Study 2 equal owners 2 equal owners salaries total: $396,782 salaries total: $396, employees 120 employees $19.7 million gross sales $19.7 million gross sales $983,900 net profit $983,900 net profit $4,318,346 book value $4,318,346 book value Salary + Profit x 4 + Book Value $396, ,900 x 4 + 4,318,346 $9,839,006 total business value Each owner is eligible for $3 million* *Maximum I&P for DBO Principal Life will consider Disability Buy-Sell on businesses of up to $20 million in value, with no one owner having over $5 million ownership interest. Disability Insurance Underwriting Valuation - Principal

22 22 Benefit Payment

23 23 Benefit Payment The monthly amount payable is equal to the lesser of: The monthly amount payable is equal to the lesser of: For Monthly For Monthly Actual monthly Buy-Out Expense the Owner incurred, or Maximum Monthly Benefit Actual monthly Buy-Out Expense the Owner incurred, or Maximum Monthly Benefit For Lump-Sum For Lump-Sum Actual lump sum Buy-Out Expense or the Owner incurred or Maximum Lump Sum Benefit Actual lump sum Buy-Out Expense or the Owner incurred or Maximum Lump Sum Benefit For Combination Lump-Sum & Monthly For Combination Lump-Sum & Monthly Actual lump sum Buy-Out Expense the Owner incurred or the Maximum Lump Sum Benefit is paid, then monthly payments, using the same above guidelines, will begin. Actual lump sum Buy-Out Expense the Owner incurred or the Maximum Lump Sum Benefit is paid, then monthly payments, using the same above guidelines, will begin. Disability Buy-Sell Insurance - Principal

24 24 Benefit Payment The Buy Out Benefit amount payable is equal to the lesser of: Face Amount of the Policy Shown on the Policy Schedule Page Purchase Price The purchase price can be found in the Buy Sell Agreement which is not required until the end of the Elimination period Fair Market Value Completed by an independent CPA Disability Buy-Sell Insurance – MetLife

25 25 How to get started For more information contact your local Plus Group office To find a Plus Group office near you: Go to and click on the agency locator map or call 1(800)

26 26 QUESTIONS ????


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