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Transcript of 1 Presented By: Lori Boggs Sales Manager MetLife Rich Van Liew Asst. Director Underwriting Asst....
1
Presented By:Presented By:
Lori BoggsLori BoggsSales Manager Sales Manager
MetLifeMetLife
Rich Van LiewRich Van Liew Asst. Director UnderwritingAsst. Director Underwriting
Principal Life Principal Life
Disability Buy-SellDisability Buy-SellFunding & ValuationsFunding & Valuations
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The risk of is 2 to 4 times greater than the risk of death during one’s 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 1990 - 1999 from the Individual Disability Experience Committee of the Society of Actuaries.
The Risk of Disability Is HighThe Risk of Disability Is High
AgeAge MaleMale FemaleFemale2525 2.5 to 12.5 to 1 4.0 to 14.0 to 1
3030 2.5 to 12.5 to 1 3.8 to 13.8 to 1
3535 2.5 to 12.5 to 1 3.6 to 13.6 to 1
4040 2.5 to 12.5 to 1 3.5 to 13.5 to 1
4545 2.5 to 12.5 to 1 3.3 to 13.3 to 1
5050 2.5 to 12.5 to 1 3.2 to 13.2 to 1
5555 2.4 to 12.4 to 1 3.1 to 13.1 to 1
6060 2.4 to 12.4 to 1 3.1 to 13.1 to 1
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Risk of Disability Grows with Risk of Disability Grows with Number of OwnersNumber 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 1990 - 1999 from the Individual Disability Experience Committee of the Society of Actuaries.
AgeAge 22 33 44
3030 56%56% 71%71% 81%81%
4040 51%51% 66%66% 76%76%
5050 43%43% 57%57% 68%68%
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Buy Sell PlanningBuy Sell Planning
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Buy Sell AgreementsBuy Sell Agreements
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What Happens To The BusinessWhat Happens To The BusinessIn The Event of an Owner’s Total In The Event of an Owner’s Total
Disability…Disability…
The active business owner may: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 owner’s family
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The Need for Disability The Need for Disability Buy-Sell PlanningBuy-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)
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Buy-sell AgreementsBuy-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:
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Many businesses have not Many businesses have not established proper plans?established proper plans?
Many Buy-Sell agreements Many Buy-Sell agreements are not funded?are not funded?
When the buy-sell When the buy-sell agreements are funded, agreements are funded, most are only funded for most are only funded for death purposes?death purposes?
Is your client’s Buy-Sell AgreementIs your client’s Buy-Sell Agreement fully funded? fully funded?
Did You Know?
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Buy-Sell AgreementsBuy-Sell Agreements
Current cash flow Establish a sinking fund Borrow the funds Disability Buy-Sell insurance
Funding Alternatives
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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 valueBusiness interest value $500,000$500,000
Tax bracketTax bracket 34%34%
Total costTotal cost $757,576$757,576
Sales needed to fund from cash flowSales needed to fund from cash flow $7,575,760$7,575,760
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Funding AlternativesFunding 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 paymentsPrincipal payments $500,000$500,000
Tax on non-deductible principal paymentsTax on non-deductible principal payments + 257,576+ 257,576
Gross profit needed for principal paymentsGross profit needed for principal payments 757,576757,576
Net interest paymentsNet interest payments + 81,014+ 81,014
Total payments needed for buy-outTotal payments needed for buy-out $838,950$838,950
Sales needed to fund repaymentsSales needed to fund repayments $8,385,900$8,385,900
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Cost to pre-fund through Disability Buy-Sell insurance:
Business interest valueBusiness interest value $500,000$500,000
Annual PremiumAnnual Premium 2,550 2,550
Maximum premiums payableMaximum premiums payable $51,000$51,000
Sales needed to pay insurance premiumsSales needed to pay insurance premiums $510,000$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
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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 DesignBuy-Sell Insurance Policy Design
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Business ValuationsBusiness Valuations
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Case StudiesCase Studies
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Formulas for Business Valuations 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
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Manufacturing/Construction Firm Valuation Book Value
Assets – liabilities + retained earnings
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)
Price/Earnings Method: Average after tax earnings + Owners Salaries – replacement
salaries x reasonable multiplier (see above)
Disability Insurance Underwriting -Disability Insurance Underwriting - MetLifeMetLife
Formulas for Business Valuations Formulas for Business Valuations
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CPA Firm Case Study
2 equal owners salaries total: $1,000,000 $50,000 net profit $100,000 book value 2 employees
2x’s Salary + Profit + Book Value $2,000,000 + 50,000 + 100,000 $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
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4 equal owners 4 equal owners Company been in business for Company been in business for
6 years and is showing growth6 years and is showing growth Book Value of $2,000,000Book Value of $2,000,000 2007 Profit of $ 150,0002007 Profit of $ 150,000 2008 Profit of $ 250,0002008 Profit of $ 250,000 2008 total Owners Salary of 2008 total Owners Salary of
$400,000$400,000
Construction Firm Case Study
Price Earnings MethodAverage after tax earnings +Owners salaries – replacementsalaries X a reasonablemultiplier
$200,000+ $400,000 x 3
$1,800,000 Business Value ------------------------------------------Capitalization of Earnings MethodAverage 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
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Capitalization of Earnings + Book ValueCapitalization of Earnings + Book Value 100% of officer compensation + business profit x 100% of officer compensation + business profit x
Multiplier of 1-5* + Book ValueMultiplier of 1-5* + Book Value
*The capitalization factor (multiplier) is dependent on the industry as *The capitalization factor (multiplier) is dependent on the industry as well as factors including years in business, net income, size of well as factors including years in business, net income, size of business and profitability.business and profitability.
Disability Insurance Underwriting - PrincipalFormulas for Business Valuations Formulas for Business Valuations
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Physician Firm Case StudyPhysician Firm Case Study
2 equal owners2 equal owners salaries total: $1,274,626salaries total: $1,274,626 20 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 $1,274,626 + 29,225 x 3 + 155,429 $4,066,982 total business value
Each owner is eligible for $1.5 million*
*Maximum I&P for physicians
Disability Insurance Underwriting Valuation - Principal
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Manufacturing Firm Case Study
2 equal owners2 equal owners salaries total: $396,782salaries total: $396,782 120 employees120 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 $396,265 + 983,900
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
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Benefit PaymentBenefit Payment
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Benefit Payment
The monthly amount payable is equal to the lesser of:The monthly amount payable is equal to the lesser of: For MonthlyFor Monthly
Actual monthly Buy-Out Expense the Owner incurred, or Actual monthly Buy-Out Expense the Owner incurred, or Maximum Monthly BenefitMaximum Monthly Benefit
For Lump-SumFor Lump-Sum Actual lump sum Buy-Out Expense or the Owner incurred or Actual lump sum Buy-Out Expense or the Owner incurred or
Maximum Lump Sum BenefitMaximum Lump Sum Benefit
For Combination Lump-Sum & MonthlyFor Combination Lump-Sum & Monthly Actual lump sum Buy-Out Expense the Owner incurred or the Actual lump sum Buy-Out Expense the Owner incurred or the
Maximum Lump Sum Benefit is paid, then monthly payments, Maximum Lump Sum Benefit is paid, then monthly payments, using the same above guidelines, will begin.using the same above guidelines, will begin.
Disability Buy-Sell Insurance - Principal
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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 – MetLifeDisability Buy-Sell Insurance – MetLife
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How to get startedHow to get started
For more information contact your local For more information contact your local
Plus Group officePlus Group office
To find a Plus Group office near you:To find a Plus Group office near you:
Go to Go to www.plusgroupus.comwww.plusgroupus.com and click on and click on
the agency locator map or the agency locator map or
call 1(800) 831-1018call 1(800) 831-1018
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QUESTIONS ????QUESTIONS ????