Make Business

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Make Business Your Business
with Disability Income Insurance
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• This presentation is believed to provide accurate
  and authoritative information in regard to the
  subject matter covered. The accuracy of the
  content is not guaranteed, and it is provided
  with the understanding that Principal Life
  Insurance Company is not rendering legal,
  accounting, tax or other professional service. If
  legal advice or other expert assistance is
  required, the services of a competent
  professional should be sought.

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Why Should You Sell DI in the Business Market?

• Advantages to YOU
• Market potential
• Income potential
• Needs based selling
• More Underwriting Options

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Why Should You Sell DI in the Business Market?

• Advantages to EMPLOYERS
• Tax efficient
• More Economical
• Meet the needs of the individual and the entity

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The only thing worse than having to work for a
living is not being able to.
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What are the odds in one year?
Lifes Risks What are the odds in one
year? Fire 1 in 222 Homes catch fire (reported
to Fire Dept.) Auto Accident 1 in 160 People
suffer bodily injuries in auto accidents Death
1 in 117 People die Disability 1 in 10 Primary
income earners become disabled Source 1994
Statistical Abstract of the United States
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The odds are, one key person will become
disabled...
Chances of a Disability Lasting 3 Months or
Longer (before age 65) Total Number of
Employees Age 2 Employees 5 Employees 10
Employees 27 66.3 93.4 99.6 37 62.4 91.3 99.2
47 54.4 85.9 98.0 57 35.4 66.4 88.7 Based
on 1985 Commissioners Individual Disability
Table B - Equally Weighted 90 Day Elimination
Period
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Formal Salary Continuation Plan (QSPP)

• Objectives of tax favored salary continuation
  plans must include providing benefits for the
  employees of a business
• Governed by Sections 105, 106 and 162 of the
  Internal Revenue Code

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Without a plan, the business

• May lose the tax deduction for payments made to a
  disabled owner or employee
• Must decide who is and isnt disabled
• Must decide how much and how long to pay benefits

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Requirements of the QSPP

• Must be in writing before the date of disability
• Cannot be for the benefit of only the
  stockholders
• Must be communicated to those covered
• Must define who is covered
• Must define when benefits begin and under what
  conditions

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Five Key Questions

• How will the plan with benefits be funded?
• How do you feel about administration of your
  employee benefit programs?
• Who will be covered?
• Will the employer pay all or a portion of the
  premiums?
• How does employer or employee wish to allocate
  tax consequences on benefit payments?

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Disability Income Insurance isthe Solution!

• Helps attract and retain quality employees
• Offers permanent, portable coverage
• Reinforces value of employee
• Premium payments are tax deductible and
  guaranteed
• Defines disability
• Defines benefit amount and benefit period

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Income Replacement

• 50 - 80 of gross earnings
• The lower the income, the higher the income
  replacement

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Disadvantages of Group LTD

• Benefit too low, may discriminate
• Taxable benefits
• Usually not portable
• Conservative definitions
• Rates not guaranteed

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Executive Bonus Heres how it works
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Double bonus can reimburse the employee for tax
consequences of the taxable bonus used to pay the
premium
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Executive Bonus Programs

• Tax deduction to employer
• Select employees
• Current tax on bonus to employee
• Income tax-free benefit to insured
• No formal plan administration

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Split Dollar Programs Split by

• Percent of premium
• Benefit amount
• Benefit period
• Elimination period
• Riders

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Case Study 1Computer Business

• Business three years old
• Mostly computer programmers/analysts
• Broker just wrote health insurance
• Interested in quality, portable protection
• Willing to pay 25-50 per month

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Solution

• Split Dollar DI
• Employer to purchase 1,000/mo 90 day wait 5
  year benefit period
• Submitted as Guaranteed Acceptance Plan offer -
  offer matches employer paid portion of benefit
  with option to rate rider

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Solution

• Each employee has chance to buy maximum benefits
  w/COLA if available
• Additional coverage purchased to be paid via
  payroll deduction (we calculated cost of coverage
  per pay period)

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Split Dollar

• How the program is split determines the tax
  consequences of premiums and benefits
• Proper documentation and support are key to a
  successful program

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Case Study 2Multi-Specialty Medical Associates

• 55 employee practice separating from hospital
• Current benefits provided by the hospital
• Wanted to match current benefits
• Current plan offers 60 to 5,000 per month - LTD
  only provided by the employer
• Concerned that when they announced the separation
  from the hospital they might lose employees if
  benefits are not attractive

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Disability Buy-Out Funding
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Advantages for the Disabled Owner

• Assures a definite price and buyer under mutually
  agreed upon terms
• No need for the firm to worry about its ability
  to meet the buy-out commitment
• Family members can place their efforts on meeting
  the needs of the disabled owner rather than
  protecting the business
• Provides extra cash to meet the needs that a
  disabling condition can generate

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Advantages to the Active Business Owners

• Assures they can buy out the disabled owner at a
  predetermined price at pre-arranged time after
  disability strikes
• Customers, creditors and employees are assured of
  business continuity
• Active owners retain control of the business
  rather than the disabled owners family members
• Competitors cannot buy the disabled owners
  business interest in the firm and force out the
  active owners

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Markets

• Small businesses of five or fewer owners
• Usually at least 10 ownership to be considered
• Need to have a plan for succession
• Have considered funding with insurance
• Excellent Prospects - Law firms, CPA firms,
  physician practice, travel agencies,
  computer/software companies, distribution
  companies, engineering companies, architectural
  firms

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Tax Consequences

• Premiums are not tax deductible, therefore
  benefit flows to the nondisabled entity income
  tax-free
• With transfer from the nondisabled owner to the
  disabled owner there may be a capital gain if the
  payment is more than the original basis
• Part of the payout can be structured as a
  noncompete or severance pay which will be viewed
  as tax deductible
• Client should consult a tax advisor

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Program Designs

• Cross Purchase
• Works best with two or three owners
• The insurance company reimburses the nondisabled
  owner/individual
• Advantage is to avoid alternative minimum tax
  ramifications
• Entity Purchase
• The insurance company reimburses the corporate
  entity
• Best used with multiple owners

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How Does the Typical Policy Pay

• Common definition of disability
• Own Occ as long as you are not working in the
  company
• Total disability only
• 12, 18 or 24 month waiting period
• Payouts can be made in a lump sum, monthly
  funding or a combination of the two

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Lump Sum Benefits

• Tax ramifications to the business and owners
  should be considered
• Alternative 10 year payout is available
• Premium structure is most expensive because the
  insurance company is committed to paying 100 of
  the proceeds

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Monthly Payout

• Tax ramifications for the insured - may be lower
  taxes with a 24, 36, or 60 month payout
• Lower premium results results due to the
  insurance company retaining the assets longer
  (longer claim payout period) and may not have to
  pay out the entire benefit
• Special Death Benefit
• Client should consult tax advisor

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Common Additional Features

• Legal Fee Benefit - reimburses between 2,000 and
  3,000 of legal fees to exercise the agreement
• Reduction of benefits at age 60 - 20 reduction
  through age 64
• Future Insurability - allows the business to
  increase the value of the policy without medical
  insurability

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DBO Underwriting

• Common valuation methods for DBO underwriting
• Personal Service Business
• 2 times income plus the retained earnings of the
  business
• Manufacturing
• Book Value plus the capitalization of excess
  earnings
• Most companies will insure up to 1.5M of value

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Business Overhead Expense Protection
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What does it do?

• Reimburses the disabled business owner(s) for
  his/her share of the normally tax deductible
  business expenses incurred
• Examples
• employee salaries - interest
• rent - depreciation
• utilities - equipment lease
• insurance - subscriptions

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Policy Design

• 30, 60, 90 day waiting periods
• 12, 18 or 24 month benefit periods
• Residual
• Future insurability benefits
• Same occupation salary rider

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Buy Out Premium Comparison
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Buy Out Premium Comparison
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BOE Premium Comparison
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All you need now is a stack of prospects...

• Existing clients
• Referrals
• Business owners

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Thank You
Donald J. Schamay Disability Sales
Manager Principal Life Insurance Company 5447
Roswell Rd. Atlanta, Ga 30342 (800)
451-8903 Principal Life Insurance Company Des
Moines, IA 50392