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Disability Buy-Sell Funding & Valuations

Disability Buy-Sell Funding & Valuations. Presented By: Lori Boggs Sales Manager MetLife Rich Van Liew Asst. Director Underwriting Principal Life . The risk of is 2 to 4 times greater than the risk of death during one’s working years. The Risk of Disability Is High.

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Disability Buy-Sell Funding & Valuations

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

  2. The risk of is 2 to 4 times greater than the risk of death during one’s working years. The Risk of Disability Is High 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.

  3. The Chances of at Least One Person in a Group Becoming Disabled for 90 days or Longer Before Age 65 Risk of Disability Grows with Number of Owners 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.

  4. Buy Sell Planning & Buy Sell Agreements

  5. What Happens To The BusinessIn 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 business • Not have funds to buy-out the totally disabled owner • Not 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 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. Buy-sell Agreements Minimizes surprises and disagreements when the unexpected happens by addressing: • 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

  8. Is your client’s Buy-Sell Agreement fully funded? • 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? Did You Know?

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

  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

  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

  12. Funding Alternatives Cost to pre-fund through Disability Buy-Sell insurance: 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.

  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 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)

  14. Business Valuations & Case Studies

  15. Formulas for Business Valuations Disability Insurance Underwriting -MetLife • 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

  16. Formulas for Business Valuations Disability Insurance Underwriting -MetLife • 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)

  17. CPA Firm Case Study Disability Insurance Underwriting Valuation - MetLife • 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

  18. Construction Firm Case Study Disability Insurance Underwriting Valuation - MetLife 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 • 4 equal owners • Company been in business for 6 years and is showing growth • Book Value of $2,000,000 • 2007 Profit of $ 150,000 • 2008 Profit of $ 250,000 • 2008 total Owners Salary of $400,000 Book Value Method Assets – Liabilities + Retained Earnings = $2,000,000

  19. Formulas for Business Valuations Disability Insurance Underwriting - Principal • Capitalization of Earnings + 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.

  20. Physician Firm Case Study Disability Insurance Underwriting Valuation - Principal • 2 equal owners • salaries total: $1,274,626 • 20 employees • $4.3 million gross sales • $29,225 net profit • $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

  21. Manufacturing Firm Case Study Disability Insurance Underwriting Valuation - Principal • 2 equal owners • salaries total: $396,782 • 120 employees • $19.7 million gross sales • $983,900 net profit • $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.

  22. Benefit Payment

  23. Benefit Payment Disability Buy-Sell Insurance - Principal • The monthly amount payable is equal to the lesser of: • For Monthly • Actual monthly Buy-Out Expense the Owner incurred, or Maximum Monthly Benefit • For Lump-Sum • Actual lump sum Buy-Out Expense or the Owner incurred or Maximum Lump Sum Benefit • 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.

  24. Benefit Payment Disability Buy-Sell Insurance – MetLife 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

  25. How to get started For more information contact your local Plus Group office To find a Plus Group office near you: Go to www.plusgroupus.com and click on the agency locator map or call 1(800) 831-1018

  26. QUESTIONS ????

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