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)