Presentation on theme: "Disability Buy-Sell Funding & Valuations"— Presentation transcript:
1 Disability Buy-Sell Funding & Valuations Presented By:Lori BoggsSales ManagerMetLifeRich Van LiewAsst. Director UnderwritingPrincipal Life
2 The Risk of Disability Is High The risk of is 2 to 4 times greater than the risk of death during one’s working years.AgeMaleFemale252.5 to 14.0 to 1303.8 to 1353.6 to 1403.5 to 1453.3 to 1503.2 to 1552.4 to 13.1 to 160Chance 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.
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 65Number of People in a GroupAge2343056%71%81%4051%66%76%5043%57%68%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.
5 The active business owner may: What Happens To The Business In The Event of an Owner’s Total Disability…The active business owner may:Not be able to pay the disabled owner an income and maintain the businessNot have funds to buy-out the totally disabled ownerNot want to share business decisions with the disabled owner’s family
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 disabilityProtects owners by providing the funding to purchase part or all of the business interest of a disabled ownerMinimizes discord among owners by setting the price and terms of a sale in the event an owner becomes disabledPrevents unwanted transfers to parties that might be unqualified or contentious (Family Members, Competitors)
7 Buy-sell AgreementsMinimizes surprises and disagreementswhen the unexpected happens by addressing:How the business will be valued at any future point in time (Purchase Price)Terms of ownership transfer and paymentHow long a total disability must last before a buy-out is triggeredShould be equal to the policy Elimination PeriodHow a total disability is to be defined or determined.Should match the definition of total disability from policy
8 Is your client’s Buy-Sell Agreement fully funded? Did You Know?Many businesses have not established proper plans?Many Buy-Sell agreements are not funded?When the buy-sell agreements are funded, most are only funded for death purposes?
9 Buy-Sell Agreements Current cash flow Establish a sinking fund Funding AlternativesCurrent cash flowEstablish a sinking fundBorrow the fundsDisability Buy-Sell insurance
10 Cost to take from cash flow or sinking fund accumulations: Funding AlternativesCost to take from cash flow or sinking fund accumulations:Business interest value$500,000Tax bracket34%Total cost$757,576Sales needed to fund from cash flow$7,575,760Assumptions: $500,000 Business Value, 5 yr repayment schedule at 9% interest, 10% profit margin; 34% corporate tax bracket, 45 year old
11 Funding Alternatives Principal payments $500,000 Cost to borrow:Principal payments$500,000Tax on non-deductible principal payments+ 257,576Gross profit needed for principal payments757,576Net interest payments+ 81,014Total payments needed for buy-out$838,950Sales needed to fund repayments$8,385,900Assumptions: $500,000 Business Value, 5 yr repayment schedule at 9% interest, 10% profit margin; 34% corporate tax bracket, 45 year old
12 Cost to pre-fund through Disability Buy-Sell insurance: Funding AlternativesCost to pre-fund through Disability Buy-Sell insurance:Business interest value$500,000Annual Premium2,550Maximum premiums payable$51,000Sales needed to pay insurance premiums$510,000Assumptions: $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.
13 Buy-Sell Insurance Policy Design Business Overhead Policy Benefit period should equal the Buy Sell Policy Elimination Period.Match policy parameters to buy-sell agreement termsBenefit Amount (Purchase Price, Fairmarket Value)Elimination periodBenefit Period (Lump Sum, Monthly Installments and Down Payment-combination of the two)Structure (Cross Purchase, Entity Purchase, Trustee Purchase)Rider (Future Insurability Option)
15 Formulas for Business Valuations Disability Insurance Underwriting - MetLifeCPA valuation2 times Salary + business profit + book value150% of gross earnings + plus book valueProfessional services valuation
16 Formulas for Business Valuations Disability Insurance Underwriting - MetLifeManufacturing/Construction Firm ValuationBook ValueAssets – liabilities + retained earningsCapitalization of Earnings:Average after tax earnings times a reasonable multiplierlow 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)Price/Earnings Method:Average after tax earnings + Owners Salaries – replacement salaries x reasonable multiplier (see above)
17 CPA Firm Case StudyDisability Insurance Underwriting Valuation - MetLife2 equal ownerssalaries total: $1,000,000$50,000 net profit$100,000 book value2 employees2x’s Salary + Profit + Book Value$2,000,000,000,000$2,150,000 total business valueEach owner is eligible for a benefit up to $1.1 million *Maximum Benefit Amount depends on payout method and elimination period
18 Construction Firm Case Study Disability Insurance Underwriting Valuation - MetLife4 equal ownersCompany been in business for 6 years and is showing growthBook Value of $2,000,0002007 Profit of $ 150,0002008 Profit of $ 250,0002008 total Owners Salary of $400,000Price Earnings MethodAverage after tax earnings +Owners salaries – replacementsalaries X a reasonablemultiplier$200,000+ $400,000 x 3$1,800,000 Business ValueCapitalization of Earnings MethodAverage after tax earnings XMultiplierx$600,000 Business ValueBook Value MethodAssets – Liabilities + Retained Earnings = $2,000,000
19 Formulas for Business Valuations Disability Insurance Underwriting - PrincipalCapitalization of Earnings + Book Value100% 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.
20 Physician Firm Case Study Disability Insurance Underwriting Valuation - Principal2 equal ownerssalaries total: $1,274,62620 employees$4.3 million gross sales$29,225 net profit$155,429 book valueSalary + Profit x 3 + Book Value$1,274,626,225x 3,429$4,066,982 total business valueEach owner is eligible for $1.5 million* *Maximum I&P for physicians
21 Manufacturing Firm Case Study Disability Insurance Underwriting Valuation - PrincipalSalary + Profit x 4 + Book Value$396,265,900x 4+ 4,318, $9,839,006 total business valueEach owner is eligible for $3 million* *Maximum I&P for DBO2 equal ownerssalaries total: $396,782120 employees$19.7 million gross sales$983,900 net profit$4,318,346 book valuePrincipal 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.
23 Disability Buy-Sell Insurance - Principal Benefit PaymentDisability Buy-Sell Insurance - PrincipalThe monthly amount payable is equal to the lesser of:For MonthlyActual monthly Buy-Out Expense the Owner incurred, or Maximum Monthly BenefitFor Lump-SumActual lump sum Buy-Out Expense or the Owner incurred or Maximum Lump Sum BenefitFor Combination Lump-Sum & MonthlyActual 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.
24 Disability Buy-Sell Insurance – MetLife Benefit PaymentDisability Buy-Sell Insurance – MetLifeThe Buy Out Benefit amount payable is equal to the lesser of:Face Amount of the PolicyShown on the Policy Schedule PagePurchase PriceThe purchase price can be found in the Buy Sell Agreement which is not required until the end of the Elimination periodFair Market ValueCompleted by an independent CPA
25 For more information contact your local Plus Group office How to get startedFor more information contact your localPlus Group officeTo find a Plus Group office near you:Go to and click onthe agency locator map orcall 1(800)