Buy-Sell Plus Marketing Guide

Disability Insurance

Table of Contents

Plan Highlights 1

Target Market 1

Buy-Sell Plus at a Glance 1

Marketing Overview 2

Plan Design 3

Plan Details 4

Occupation Classes 4

Issue Ages 4

Minimum Issue Limit 4

Maximum Issue Limits 4

Modal Factors 4

Policy Fee 4

Total Disability 4

Adjusted Buy-Sell Expense 5

Disability Benefits 5

Funding Methods 6

Settlement Option 6

Regular Care of Physician 6

Elimination Period 6

Non-Cancellable and Guaranteed Renewable to age 63 6

Conversion Privilege 7

Transfer of Insurability Option 7

Waiver of Premium 7

Death Benefit 7

Legal and Accounting Expense Benefit 7

Exclusions 7

Ownership and Taxation 8

Cross Purchase Method for Partners or Shareholders 8

Corporate-Purchase Method 8

Business Valuation 9

Riders 10

Future Income Option (FIO) 10

1

Plan Highlights

Target Market

Owners of small, closely held businesses (generally

two to five owners)

Must own at least 10% of business

Must be working for business full-time

Buy-Sell Plus at a Glance

Reimburses the funds used to buy-out a disabled

owner’s share of the business

Non-Cancellable, guaranteed renewable to age

63 — Premiums cannot be increased and benefits

cannot be reduced while premiums paid on time, as

long as still working within the business

‘Regular occ’ definition of total disability for class

2A — Disability means inability to perform substantial

duties of regular occupation and not working

elsewhere

‘Own occ’ definition of total disability for classes 4A

and 3A — Added protection for those whose current

profession involves specialized sensory / manual tasks

requiring years of training

Accumulation of days of disability in order to satisfy the

elimination period

Waiver of premium — No premiums required after

90 days of disability

Legal and Accounting Expense Benefit — Reimburses

up to $5000 for the legal or accounting expenses

incurred while executing the buy-sell agreement

Conversion Privilege — Can convert to an income

replacement policy without medical evidence

Transfer of Insurability Option — Can transfer coverage

to a new business without medical evidence at original

age rates

Death Benefit — Lump sum paid if death occurs while

receiving monthly installments

Future Income Option — Allows owner to purchase

additional insurance without evidence of good health

2

Marketing Overview

The loss of a business partner is one of the most serious

risks to the survival of small closely held businesses.

Therefore, we commonly help our clients plan for business

succession at retirement and in case of premature death.

However, many of your clients may not have a disability

buy-sell agreement. You should strongly encourage them to

put one in place and then arrange for quality insurance to

fund the agreement.

Buy-Sell Plus is specifically designed to help the healthy

owners of a small business purchase the interest of a

disabled owner. There are several reasons why this is

desirable. Most small businesses cannot afford to

indefinitely meet the cash requirements of a nonproductive

owner. Also, a disabled owner may begin to view the

business as an investment, which may have a conservative

influence on his or her business decisions. Furthermore, the

active partners may not want to share future profits with a

partner who is not contributing to the business.

The active owners will therefore usually want to buy-out

and replace a disabled individual. Meanwhile, the disabled

owner needs to receive a fair payment for his/her share of

the business. A disability buy-sell agreement is the logical

solution to both parties needs.

Advantages of a Disability Buy-Sell Agreement

to Active Principal to Disabled Principal

Guarantees that disabled owner’s interest can be purchased at a definite price

Guarantees a market for ownership interest at a pre-arranged price

Removes need to involve disabled owner’s familymembers in the business

Family members don’t need to become involved inbusiness to protect their interests

Prevents competitors from buying disabled owner’sshare

Business interest is converted to a cash asset

Minimal disruption to cash flow when funded byinsurance

Freedom from risk of future business losses

3

Plan Design

Buy-Sell Plus provides top quality NON-CANCELLABLE,

GUARANTEED RENEWABLE disability buy-out coverage.

Premiums are guaranteed level to age 63. However, the

policy will terminate if your client stops working full-time for

the business. If this happens, coverage can either be

transferred to a new business or converted to a personal

disability policy.

Buy-Sell Plus provides the cash required to complete a

disability buy-out. Also, by having the buy-sell agreement

funded by insurance, Manulife Financial assumes the

responsibility for determining if total disability exists and if

the elimination period has been satisfied: This removes the

potential for conflict between the business owners.

Total disability benefits depend on the ability of clients to

perform the substantial duties of their regular occupation.

For class 4A/3A, an ‘own occ’ definition allows clients to

work in a new occupation and still receive full benefits for a

total disability.

There are three funding methods available: lump sum,

monthly installment and down payment. The lump sum

approach is the easiest to administer but there may be tax

considerations that favour monthly installments. The

funding method should be chosen with input from your

clients’ lawyer and/or accountant.

Buy-Sell Plus provides several value-added benefits: Waiver

of Premium, Legal Expense Benefit, Conversion Privilege,

Transfer of Insurability Option and Death Benefits. Also, the

Future Insurance Option allows your clients to gradually

increase the amount of insurance as the business expands.

4

Plan Details

Occupation Classes

4A, 3A, 2A

Must own at least 10% of the business

There are numerous guidelines that must be

considered in each case. Please see the disability

underwriting guide for more information

Issue Ages

18 - 55 (age at last birthday)

Minimum Issue Limit

$50,000 aggregate, i.e., $50,000 lump sum OR if

monthly method chosen, $50,000/(number of months

in Benefit Period).

Maximum Issue Limits

Insured’s ownership interest (business value X insured’s

percentage ownership) up to an aggregate limit that

depends on class, Elimination Period and Benefit Period

as below:

Elimination PeriodClass Benefit Period 12 24

4A Lump Sum 500,000 1,000,0005 Years 1,250,000 1,750,000

3A Lump Sum 400,000 900,0005 Years 1,000,000 1,500,000

2A Lump Sum 225,000 525,0005 Years 600,000 900,000

Note that when monthly benefits are involved, the limits are

calculated by taking the above maximum and dividing by

the number of months in the Benefit Period. For example, a

4A client with a 24-month Elimination Period and five-year

Benefit Period has a maximum issue limit of $1,750,000,

which is equal to a Monthly Benefit limit of $1,750,000 /

(5 X 12) = $29,167

If the down payment method is used, the lump sum limit

applies to the lump sum amount and any remaining amount

would be available as a Monthly Benefit. For example,

a 3A client with a 12-month Elimination Period and five-year

Benefit Period has a maximum issue limit of $1,000,000.

The client chooses a lump sum amount of $400,000 (the

lump sum maximum), so the monthly sum limit would be

($1,000,000 - $400,000) / (12 X 5) = $10,000

Modal Factors

0.514 semi-annual

0.0875 monthly (automatic)

Policy Fee

$50

Total Disability

Buy-Sell Plus provides total disability benefits if clients are

unable, due to injury or sickness, to perform the substantial

duties of the occupation in which they were engaged at the

start of the disability. They must not be working at any

occupation, and must also be under the regular care of a

physician.

For classes 4A and 3A, the requirement that the insured not

be working is waived: any earnings from a new occupation

do not affect benefits.

Total disability benefits equal the lesser of the adjusted

buy-sell expense (see below) or the benefit amount of

the policy.

5

Adjusted Buy-Sell Expense

The buy-sell expense is the amount paid by the healthy

owners to the disabled owner under the terms of the buy-

sell agreement. The buy-sell expense must be based on your

client’s ownership interest in the business prior to the onset

of injury or sickness. We also require that the buy-sell

expense be determined according to the value of the

business entity in accordance with generally accepted

business valuation practices. The valuation may be done at

either the date of disability or the end of the elimination

period. If the valuation becomes an issue, the owner or we

may invoke independent adjudication. The owner may

select (subject to our agreement) an adjudicator who is an

active member of the Canadian Institute of Chartered

Business Valuators and a member of a major national

chartered accounting firm in Canada. We will pay for all

adjudication costs.

The buy-sell expense is multiplied by an age adjustment

factor when disability occurs after age 60 as below. Subject

to the policy limits, this adjusted buy-sell expense is the

maximum amount that we will pay for a disability claim.

If Disability Occurs Age Adjustment Factor

Before age 60 100%

Between age 60 and 61 80%

Between age 61 and 62 60%

Between age 62 and 63 40%

Disability Benefits

We will pay benefits for total disability if:

your client was an owner of the business and was

working full-time within the organization when

disability began,

the policy was in force when disability began,

your client remained totally disabled for the

Elimination Period, and

Because of disability, a buy-sell agreement requires

that your client dispose permanently of his/her entire

ownership interest in the business.

Once the above conditions have been met, the continuance

of total disability is not required for any subsequent

payments. In other words, if the benefits are being paid in

installments over five years and your client recovers during

the second year, the buy-sell payments will continue for the

remaining three years. However, benefits will cease on the

death of your client except for payments under the

Settlement Option or the Death Benefit Provision.

As an example of how the buy-out works, Robert, Jane

and Frank are three partners in a law firm. Each of them

owns policies on the other two partners. If Frank is disabled

throughout the Elimination Period, the buy-sell agreement is

triggered. Frank is forced to sell his share of the partnership

to Jane and Robert in exchange for a pre-determined price

based on the business value. The Buy-Sell Plus policy

reimburses Jane and Robert for their actual buy-sell

expenses paid to Frank. The insurance benefits paid to

Jane and Robert are tax-free. The money paid to Frank for

his ownership share is taxed as a capital transaction

(see ownership section for further details).

6

Funding Methods

We offer three funding methods as described below. The

funding method of the contract should match the terms of

the buy-sell agreement, although there are contractual

provisions to cover any mismatching.

1. Lump Sum Funding Method

After the Elimination Period is completed, we will pay a

lump sum equal to the lesser of the lump sum benefit

limit of the policy or the adjusted buy-sell expense.

2. Monthly Funding Method

After the Elimination Period is completed, we will pay

monthly benefits for the duration of the Benefit Period,

or until the maximum benefit is paid if longer. The

amount of the payments will equal the adjusted buy-sell

expense, up to the monthly benefit limit of the policy.

3. Down payment

This method consists of an initial lump sum payment

followed by monthly benefits as described above.

Settlement Option

Your client may request that any benefits owing be paid out

in guaranteed installments over a period of up to 10 years.

Regular Care of Physician

To be considered disabled, your client must be receiving

medical care that is appropriate in nature and frequency for

the condition. We may require psychiatric consultations for

claims that are related to a mental or nervous disorder or

that are contributed to by alcohol or drug use.

Elimination Period

This is the number of days of total disability that must

elapse before benefits are payable. Days of disability (from

one or more causes) may be accumulated within the periods

indicated below in order to satisfy the elimination period.

Elimination Period Accumulation Period

12 months 18 consecutive months

24 months 48 consecutive months

Non-Cancellable and GuaranteedRenewable to age 63

Once the policy is issued and while premiums are being paid

on time:

We cannot cancel the policy;

We cannot increase the rates;

We cannot make any changes to the terms of the

contract; and

We cannot reduce benefits because of a change to a

more hazardous occupation within the business.

The policy will terminate at age 63 or on the date that

your client ceases to be employed full-time for the business.

In the latter case, your client may take advantage of either

the transfer of insurability or conversion features described

below.

7

Conversion Privilege

Prior to your client’s 60th birthday, the owner may convert

the Buy-Sell Plus policy to an income replacement policy. To

qualify, your client must be employed on a full-time basis

and must not be disabled. We will base the premiums for

the new policy rates on the original class of risk and your

client’s attained age.

The maximum Benefit Period of the new policy will be two

years. The Elimination Period may be 90 days or greater. The

monthly benefit amount, subject to our published limits,

must not exceed $2,500 (4A/3A) or $1,000 (2A).

This option is not available if the Transfer of Insurability

Option is elected.

Transfer of Insurability Option

This provision applies if your client stops working for the

original business and starts working full-time for another one

in which he or she has an ownership interest. If this happens

before age 56, your client may transfer the buy-sell coverage

to the new business without evidence of good health.

Application for the new coverage must be made within

90 days of leaving the original business. We will base the

premiums for the new policy on your client’s original age and

your client’s insurable interest in the new business, up to the

maximum benefit limit of the original policy. The new

Elimination Period may not be less than the original. This

option is not available if the conversion privilege is exercised.

Waiver of Premium

Premiums will be waived after your client has been totally

disabled for 90 days. Periods of disability due to the same or

related causes, separated by up to six months, may be

accumulated in order to qualify for the waiver of premium.

We will refund any required premium paid since the onset

of total disability. Premiums will continue to be waived while

your client is totally disabled during the Elimination Period

and while total disability benefits are being paid.

Death Benefit

If monthly benefits are being paid and your client dies, we

will pay an amount equal to three times the monthly benefit

limit. Disability benefits will then cease.

Legal and Accounting Expense Benefit

We will reimburse the owner for any legal and accounting

expenses, up to a maximum of $5,000, incurred in the

performance of the buy-sell agreement. This is in addition

to the maximum benefit of the policy.

Exclusions

The policy does not pay benefits for conditions due to acts

of war (declared or undeclared), normal pregnancy, during

incarceration, or if we excluded the condition from the

policy during underwriting.

8

Ownership and Taxation

All benefits from Buy-Sell Plus are paid to the owner of the

policy on a tax-free basis, to reimburse payments made to

the disabled business owner. Premiums are NOT tax

deductible, regardless of policy ownership.

When a buy-out occurs, the disabled owner will have to pay

income tax, either on a capital gain or dividend, depending

on the type of buy-out agreement. The buy-out can be

structured in two ways — as a shareholder cross purchase or

as a corporate purchase. Your clients should always discuss

their buy-out agreement with a lawyer or accountant.

Cross Purchase Method for Partners orShareholders

With this method, each principal owns a policy on each of

the other principals. Because of the number of policies

required for large groups, this method is usually only

practical for small businesses. A disadvantage of the method

is that the younger owners, who usually have less

ownership interest, have to pay higher premiums to insure

their senior partners.

If a buy-out occurs, the disabled principal will have a capital

gain from the excess of the buy-out price over his or her

adjusted cost base in the business. Under current rules,

50% of this gain would be taxable. If the business is a

qualified small business corporation (QSBC), within the

meaning of the Income Tax Act, the gain may be sheltered

by the capital gains exemption available on shares of a

QSBC. It can be advantageous to use a monthly funding

method so that a disabled owner can claim a reserve for the

payments not yet received, thereby spreading out the capital

gain over several years.

Corporate-Purchase Method

With this method, the corporation owns a policy on each

shareholder, pays the premiums and receives the benefits.

Unlike life insurance, the corporation cannot add the

insurance benefits to the company’s Capital Dividend

Account.

If a buy-out is triggered, the disabled owner receives a

taxable deemed dividend when the corporation buys back

his or her shares. The disabled owner must pay tax on the

excess of the dividend received over the paid-up capital

amount of the shares.

Note that the adjusted cost base of the remaining principals

is not increased with this method. Also note that the

disabled owner will not be able to use the capital gains

exemption, as a capital gain is not realized on this type of

transaction.

9

Business Valuation

Business valuation is not always a simple task, and certainly

can be described as an art rather than an exact science.

For a company that is a “going concern”, a variety of factors

can add considerable value to the business beyond what

appears on its balance sheet. For instance, the reputation of

the business, its location, continuity of experienced staff and

customer loyalty may all add significant value. On the other

hand, the “good will” element may be minimal for a small

personal services business that relies on the specialized skills

of a particular owner.

A disability buy-out agreement should be properly funded

with quality insurance, and this requires that an acceptable

business value be established during the underwriting

process. To assist you, some common business valuation

methods are shown below. Please note that any other

reasonable business valuation method may also be

submitted. Also, we will accept any business valuation done

by a member of the Canadian Institute of Chartered

Business Valuators who is a member of a major C.A. firm

and experienced in business valuation.

*Average of past two consecutive years.

Business Valuation methods:

1) Medical Professionals

Business Value = Net Book Value + (Average* Gross Billings X 0.75)

2) Legal and Accounting Firms, Insurance Agencies

Business Value = Net Book Value + (Average* Gross Billings X 1.2)

3) All Other Businesses

Business Value = Net Book Value + (Average* Net Income X Factor)

Note: For corporations, the amount of each owner’s average* salary in excess of $100,000 may be added to the Average* Net Income.

The appropriate multiplier of net income is determined as follows:

Profile of Business EntityFactor for

CorporationFactor for

Partnership

Stable product-oriented businesses (manufacturing, wholesale, retail) with pattern of increasingprofits, no losses or significant changes in business operations in past three years, in existencemore than five years, owners are class 4A risks.

7 5

Product-oriented businesses in existence five years or less, or those with some fluctuation inprofits or changes in operations. Also, well-established personal services businesses with patternof increasing profits, no losses or significant changes in business operations in past three years, in existence more than five years and more than five employees.

4 3

All small personal services businesses, especially those very dependent on owner’s expertise.Product-oriented businesses with instability of profits or significant changes in businessoperations.

2 1

10

Riders

Future Income Option (FIO)

Issue Ages: 18-50

Only available for policies issued on a standard

premium basis

Minimum Total Option Amount: $100,000 aggregate

Maximum Total Option Amount: Two times basic

amount, up to the Maximum Issue Limits.

This rider allows your client to purchase additional disability

buy-sell insurance without evidence of good health.

Option dates occur each year for ten years from the policy

date or to age 55 if earlier. We will automatically notify your

client that additional coverage may be purchased. To qualify,

your client must be employed full-time for the business and

must not be disabled. We may require proof that the

additional coverage is justified by the current business value.

We will add any FIO purchases to the existing policy with

rates based on the attained age and the then current rate

scale.

11

Buy-Sell Plus is sold by, and is a registered trademark of,Manulife Financial (The Manufacturers Life Insurance Company).

Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates includingManulife Financial Corporation.

(05/2006)