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DISABILITY PRODUCTS FOR THE BUSINESS MARKET

Presented by:

Disability Resource Group, Inc.800.945.9719

www.drgdi.com

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DISABILITY PRODUCTS DISABILITY PRODUCTS FOR THE BUSINESS MARKETFOR THE BUSINESS MARKET

• Business Overhead ExpenseBusiness Overhead Expense

• Buy-SellBuy-Sell

• Multi-Life SalesMulti-Life Sales

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Business Overhead ExpenseBusiness Overhead Expense

• If you are a business owner and become too sick or hurt, what impact would that have on your business?

• Who would pay your business overhead expenses?

• How could you keep your business open?

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The Reality• 30% of all people 35 to 65 will suffer a

disability for at least 90 days and one in seven will be disabled for five years.*

• There is a disability caused by a motor vehicle crash every 30 seconds. **

• The probability of at least one owner in a two-owner firm becoming disabled before reaching age 65 is 23%, if each is age 30.

* Health Association of America; * Health Association of America; The New York Times, 02.02The New York Times, 02.02

****National Safety Council Accident Facts, 02.02National Safety Council Accident Facts, 02.02

***Based on recent disability insurance industry experience***Based on recent disability insurance industry experience

Consider The Likelihood...Consider The Likelihood...

Chances of a Disability Lasting 12 Months or Longer (before age 65)

Age 2 Owners 3 Owners 4 Owners

27 26.3% 36.7% 45.7%

37 24.5% 34.5% 43.1%

47 20.7% 29.4% 37.1%

57 12.1% 17.6% 22.8%

Commissioner’s Individual Disability Table B - Equally Weighted 90 Day Elimination Period.

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Ideal CandidatesIdeal Candidates

• Medical Professionals

• Veterinarians

• Architects

• Smaller Law Firms

• Smaller CPA firms

• Hairdressers

• Photographers

• Tailors

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Ideal CandidatesIdeal Candidates

• Owner is the major revenue generator

• Business has less than 10 employees

• Been in same location two years or more

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Examples of Covered ExpensesExamples of Covered Expenses• Lease or mortgage payments

• Utilities

• Employee salaries and benefits

• Payments for leasing or purchasing furniture and

equipment

• Accounting, billing, and collection fees

• Janitorial, security, and maintenance

• Premiums for malpractice, property, liability

insurance

• Professional trade dues and subscriptions

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Expenses that are Expenses that are NOTNOT covered covered

Salary and Benefits for:• The insured

• Any person sharing business expenses with the insured

• Any member of the insured's profession

• Any individual hired to perform the insured’s

duties**• Any person responsible for the generation of

income for the business

• Any member of the insured’s immediate family, who was not a full-time employee prior to disability.

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Other Expenses that are Other Expenses that are NOTNOT covered covered

• Expenses that are passed along to the consumer (Lab Fees, Medical Supplies, etc.)

• Professional Tools or Wares• Travel and Entertainment• Costs of Goods• Additions to Inventory• Any Expense the Insured did not have prior to the

disability*

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Elimination and Benefit Periods AvailableElimination and Benefit Periods Available

Waiting Periods:

• 30, 60, or 90 days(0 days for presumptive disabilities, some carriers)

Benefit periods:

• 12, 18, and 24 months

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Optional RidersOptional Riders

• Replacement Expense Rider

• Residual Disability Rider

• Future Insurability Option

• Income Protection

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Issue and Participation LimitsIssue and Participation Limits

White Collar :

Max issue $30,000 per month Top Occ Classes

Limits per Occ Class will vary,

i.e. 3A-Issue $15k /Participate $20

Blue Collar:

Issue $10,000/ Participate $12,000 per month

Top Classes only

Limits per Occ Class will vary,

i.e. 3A-Issue $9k, 2A-$7,000 per month

May not offer to all classes or occupations

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Business Overhead Expense Business Overhead Expense Underwriting Underwriting

• Financial: Most Recent Business Tax Returns, all

schedules.

(Two Full Years Preferred)

• Medical:Telephone Interview (all amounts and ages),Blood/Urine, Para Med, EKG (by amount, age, and state)

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Other BOE Features can haveOther BOE Features can have

•True Own Occupation Definition

•Non Cancelable Contracts

•Covers expenses for up to two years

•Conversion Options Available

•Premiums waived during disability

•Premiums are Tax Deductible

•Discounts for Three or More Partners

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Sales Opportunity?Sales Opportunity?

• There are more than 6.6 millioncompanies in the United States.

• More than 50% are small businesses.

• 68% have no DI coverage at all!

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What happens when a Business Partner becomes disabled?

• Would they want to sell their share of the business?

• Would they want to buy out the healthy partner(s)?

• How would the price be determined?

• Where would the money come from?

• Is it guaranteed to be there when it’s needed?

Disability Buy/Sell ContractsDisability Buy/Sell Contracts

In the Event of a Disability,There In the Event of a Disability,There Are Many Issues to be ResolvedAre Many Issues to be Resolved

The disabled partner may:• Become a drain on income while not

contributing to the business• Have different priorities for the

business income and profits and may not want to reinvest profits

• Decide to let their spouse or relative take over his/her role in the business

In the Event of a Disability, thereIn the Event of a Disability, there are Many Issues to be Resolved are Many Issues to be Resolved

The healthy partner:• May not be able to pay the disabled

partner an income and maintain the business

• May not have funds to buy the disabled partner out

• May not want to share business decisions with the disabled partner’s family

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Advantages of a Buy-Sell AgreementAdvantages of a Buy-Sell Agreement

• Assures active business owner can buy out the

disabled owner at a predetermined price and pre-

arranged time after disability strikes.

• Maintains business continuity and credibility -

which are concerns of customers, creditors and

employees.

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Advantages to the Disabled Advantages to the Disabled Business OwnerBusiness Owner

• Creates an automatic market by guaranteeing a definite and fair price and a buyer for the business interest

• Assures that his/her financial future is no longer contingent upon the strength of the business

• Provides money which may be needed to pay medical bills and living costs

• Avoids involving the disabled owner and his/her

family in the management of the business

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Advantages to the Active Advantages to the Active Business OwnersBusiness Owners

• Avoids negotiation of price• Assures complete and orderly transfer of

ownership• Retains control of the business

• Competitors cannot purchase the disabled

owner’s business interest in the firm and

force out the active owners

Once Again, Consider The Likelihood...Once Again, Consider The Likelihood...

Chances of a Disability Lasting 12 Months or Longer (before age 65)

Age 2 Owners 3 Owners 4 Owners

27 26.3% 36.7% 45.7%

37 24.5% 34.5% 43.1%

47 20.7% 29.4% 37.1%

57 12.1% 17.6% 22.8%

Commissioner’s Individual Disability Table B - Equally Weighted 90 Day Elimination Period.

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Buy-Sell ConsiderationsBuy-Sell Considerations

• Date to Establish a Plan• The date the owner first becomes disabled; or• The trigger date of the buy-sell agreement

• Method of payment

• When is the first payment due?

• How should it be paid? • Lump sum payment

• Monthly installments

• Combination of both

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Buy-Sell Agreement ConsiderationsBuy-Sell Agreement Considerations

Structure of the agreement:• Cross-purchase agreement

• Works best with two owners• Insurance company reimburses the non-disabled owner(s)• Receive step up in basis

• Entity purchase agreement• Insurance company reimburses the corporate entity• Best to use with multiple owners

The most practical solution is...The most practical solution is...

• A written agreement that specifies when and for how much the buy-out will take place, and...

• is funded with the right amount of Disability Buy-Sell insurance.

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Why Disability Buy-Out Insurance?Why Disability Buy-Out Insurance?

• Objective• The objective of Disability Buy-Sell insurance is

to 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

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How Does it Work?How Does it Work?

• The non-disabled owner(s) are reimbursed for buy-out expenses paid during the buy-sell process

• Premiums are non-deductible (IRC 265; Rev. Rul. 66-262, 1966-2 C.B. 105)

• Benefits are received income tax-free (IRC 104(a)(3); Rev. Rul. 66-262, 1966-2 C.B. 105)

• The disabled owner is taxed only on the gain from the sale of the business. The gain may be considered an installment sale if at least one payment is to be received after the close of the tax year in which the sale was made. Clients should contact their tax advisor for details.

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Cross Purchase AgreementCross Purchase Agreement

• Each owner owns a policy on each of the other owners

• After disability, the non-disabled owner(s) purchase the

disabled owner’s share in accordance to the Buy-Sell

Agreement and receives policy benefits (up to the

maximum policy limit) as a reimbursement

• The non-disabled owner(s) then own the business, and

the disabled owner has been paid the price agreed upon

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How a Cross Purchase Agreement WorksHow a Cross Purchase Agreement Works

Premium

BusinessOwner A

BusinessOwner B

Buy-Sell Agreement

Insurance Company

Premium

Policy andDisability Benefits

on Owner B

Policy andDisability Benefits

on Owner A

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Advantages/Disadvantages of a Advantages/Disadvantages of a Cross Purchase AgreementCross Purchase Agreement

Advantages

• Policies are not available to business creditors

• Non-disabled owners receive an increase in their basis

Disadvantages

• If there are more than two owners, the number of policies needed may not be practical

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Entity Purchase AgreementEntity Purchase Agreement

• The business purchases and owns a disability buy-out policy on each owner

• After disability, the business purchases the interest of the disabled owner in accordance to the buy-sell agreement and receives policy benefits (up to the maximum policy limit) as a reimbursement

• The non-disabled owners then own the business, and the disabled owner has been paid the price agreed upon

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How an Entity Purchase How an Entity Purchase Agreement WorksAgreement Works

BusinessOwner A

BusinessOwner B

Business

InsuranceCompany

Premium Policy andDisability Benefits

on Owners A and B

Buy-SellAgreement

Buy-SellAgreement

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Advantages/Disadvantages of an Advantages/Disadvantages of an Entity Purchase AgreementEntity Purchase Agreement

Advantages

• Only one policy per business owner is necessary

Disadvantages

• Policies are open to claims by creditors

• The buy-out will not increase the healthy owner’s basis

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Ideal CandidatesIdeal Candidates

• White to Gray Collar, small to medium-sized businesses with less than 10 owners

• 10% ownership to be considered

• Need to have a plan for succession

• Owners that depend on each other to keep the business running smoothly

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Common Methods to Calculate Common Methods to Calculate Business ValueBusiness Value

• For Personal Service Businesses:

- 2 times income plus the profit of the business

• For General Businesses:

- Book value plus capitalization of excess earnings

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Elimination PeriodsElimination Periodsand Pay Out Methodsand Pay Out Methods

• 365, 540, or 730 Day Elimination

• Lump Sum

• Monthly Installments over 2, 3, or 5 Years

• Combination of Lump Sum and Monthly Installments

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Issue and Participation LimitsIssue and Participation Limits

• Total Pay Out: Up to $2,000,000

• Limits per Occ Class

• Limits per Pay Out Method

• Limits per Elimination Period

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Disability Buy/Sell Underwriting Disability Buy/Sell Underwriting

• Financial: Most Recent Business Tax Returns, all

schedules.

(Three Full Years Preferred)

• Medical:Telephone Interview (all amounts and ages),Blood/Urine, Para Med, EKG (by amount, age, and state)

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Disability Buy/Sell CarriersDisability Buy/Sell Carriers

• Lloyd’s of London

• MassMutual

• MetLife

• Principal

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Multi-Life Disability InsuranceMulti-Life Disability Insurance

YYOUR GATEWAY TO A OUR GATEWAY TO A SUCCESSFUL CARRER IN SUCCESSFUL CARRER IN

INSURANCE SALESINSURANCE SALES

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What is it?• Individual Disability Insurance offered

at a discounted and Uni-Sex Rate to 3 or more employees at the same firm

• Discounts can range from 15% to 35%

• Individual, Group Supplement, and Retirement Completion products available

• Higher Issue and Participation Limits

• Underwriting Concessions

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Underwriting Concessions?Underwriting Concessions?

• Simplified Underwriting

• Guarantee To Issue

• Guaranteed Standard Issue

Guaranteed Guaranteed

Standard Issue?Standard Issue?

YES!YES!

It’s a Win-Win-Win It’s a Win-Win-Win

For Everyone!For Everyone!

Guaranteed Guaranteed

Standard Issue?Standard Issue?

YES!YES!

It’s a Win-Win-Win It’s a Win-Win-Win

For Everyone!For Everyone!

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• Guaranteed Issue

• No detailed underwriting process

• Discounted premiums on unisex rates

• Rapid turnaround of application

• Higher income protection

• Can be employer paid

Insured WinsInsured Wins

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• Create perks for key employees

• Deductible business expense

• List billing

• Reduce LTD costs

• Foster persistency and loyalty among key employees

• Allow employer to add an additional benefit without incurring additional cost

Employer WinsEmployer Wins

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• No detailed underwriting process; streamlined underwriting

• Approach multiple insureds —

• cross-selling opportunities

• Discounted premiums on unisex rates

• One plan design for all

• Multiple sales — more commission $$$

Broker WinsBroker Wins

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Guaranteed Standard IssueGuaranteed Standard Issue

• Guaranteed standard issue to those meeting eligibility requirements

• Targeted at executive/professional occupational groups within single employer

• Minimum 10 participating lives for 100% employer-paid cases

• Plan design at group level

• Can be 100% employer-paid, partially employer- paid, or 100% employee-paid

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Ideal CandidatesIdeal Candidates• 25 person or larger Law Firm, 60% of income covered

by employer paid group plan with $7,000 cap, employer will pay for supplement, average income $175,000

• 12 person Accounting firm, no group LTD in place, employer will pay premium, average income $65,000

• 100 person I.T. firm, 60% of income covered by employer paid group plan with $5,000 cap, supplement is Voluntary, average income $95,000

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Appropriate IndustriesAppropriate Industries

• Law Firms

• I.T. Firms

• Accounting Firms

• Engineering Firms

• Architecture Firms

• Banks

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Inappropriate Industries

• Medical Professionals

• Commissionable Sales

• Fewer than 10 Full Time Employees

• 1099 Employees

• Blue Collar

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Case DesignCase Design

• Generally with Group LTD Carve out Wrapped around group Reverse carve out

• Available riders Residual/partial Social Insurance Offset Inflation Catastrophic Benefit Retirement Completion

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Employer-Paid Voluntary

Min. Size Group 15 participants 70 or more eligible participants*

Min. Participation 100% required 70+ eligible participants 30%

Occ Class 5AP-3AP3AP cannot be more than 15% of total lives

N/A to medical occupations

5AP-3AP3AP cannot be more than 15% of total lives

N/A to medical occupations

Discounts Discounts range from 20 to 30% off unisex rates depending on the case size.

Discounts range from 20 to 30% off unisex rates depending on the case size.

GI Max Issue Limits

# of Issue Part. Max. GI Amt.**

15-99 $100/life/month to max. of $6000

100+ $8000

# of Eligible Max. GI Issue Participants Amount**

70-149 $3000

150-299 $4000

300+ $5000

Employer-Paid and Voluntary Plan Specifications

*For cases with 15-69 eligible lives, the Home Office will consider making an offer on a Guaranteed Issue basis. Such an offer is contingent on a minimum of 15 paid lives. If fewer than 15 paid lives are written, full underwriting will be required. Discounts and GI maximum Issue Limits are the same as for cases of 70-149 eligible participants.

**The maximum amount available can vary based on the characteristics of the group.

Sample Plan DesignSample Plan Design

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Minimum Participation:

Employer Paid — 100% required minimum of 10 participants

Voluntary — 30% target minimum of 25 participants

Guaranteed Standard IssueGuaranteed Standard Issue

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DiscountsDiscounts

• 100% Voluntary GI

• Employer-Paid Eligible

• Participation Employees Discount

• 15 – 49 70 – 149 20%

• 50 – 99 150 – 299 25%

• 100 + 30% 35%

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Guaranteed Standard IssueGuaranteed Standard Issue

• Guaranteed Issue Maximum• I&P Limits for Employer-Paid Cases • Specific plan design and maximum Guaranteed

Issue amounts depend on group characteristics:

- Industry - Turnover rate

- Occupations - LTD experience

- Financials - Age

- Local economy• Each case is different

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Information Needed to QuoteInformation Needed to Quote

• Carrier Specific Multi-Life Offer Proposal Request Form

• Electronic Census with Occupation, Titles,

Income, Bonus, Gender, Smoking Status

• As much information on the group and company as possible

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Other Multi-Life OpportunitiesOther Multi-Life Opportunities

• Guaranteed to Issue

• Simplified Underwriting

• Fully Underwritten

• Group Supplement

• Retirement Completion

• Association Plans

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Multi-Life CarriersMulti-Life Carriers

• MassMutual

• MetLife

• Principal

• Union Central

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Group Supplement FeaturesGroup Supplement Features

• An individually owned and portable contract.• Premiums that will never be increased and a

contract that is non-cancelable.• Enhanced return-to-work benefits to

supplement your current group LTD plan.• Discounted premiums (discount is portable).

But, most importantly…

Supplemental income insurance plans enhance existing group LTD benefit to maximize

income protection in the event of a disability

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Group LTD LimitationsGroup LTD Limitations

• Benefit maximums and offsets• Benefits usually income-taxable• Bonus, commission, pension benefits may

not be covered• Typically not portable• Cost of living adjustments typically not

standard• Rate guarantees no longer than three years• Cancelable coverage by carrier

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Disability Multi-Life SalesDisability Multi-Life Sales

• Everybody Wins with GSI

• Substantial Discounts

• Uni-Sex Rates

• Guarantee to Issue/Simplified Underwriting

• Cross Selling with the Employer

• Tremendous Prospecting Opportunities

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Benjamin K. Perez800.945.9719 Ext. 303

drgdi.com