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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 ????