we operate as john hancock in the united states, and manulife in other parts of the world. 3...
TRANSCRIPT
We operate as John Hancock in the United States, and Manulife in other parts of the world.
3 Mistakes Every Business Owner Must Avoid
Leigh Aslanis, CPCA, EPC, CHSDirector, Living Benefits
Read the paper…
The Globe and Mail
Case Study
▪ Mark, 46, $125,000 - Owner, Build Me Inc.
▪ Andrea, 44, $125,000 - Owner, Build Me Inc.
▪ John, 32, $75,000 – Designer
▪ Build Me Inc. – Architecture & Design firm
▪ Specialize in commercial space
▪ Looking for disability insurance (brother of Andrea had a “scare”)
Current Situation
▪ No group LTD
▪ Leave funds in the business every year
▪ Allocate funds for risk management
▪ $2,000,000 of T10 life insurance sold 2 yrs. ago
▪ No critical illness
▪ No disability
Mistake #1: Shareholder agreement not funded for DI
▪ “What does it say?”
▪ “What is your definition of disability?”
▪ “Is it signed?”
▪ “Is it funded?”
Why Life Buy-Sell and not DI?
Why Life Buy-Sell and not DI?
▪ If the disability lasts longer than 90 days,
▪ the average length* will be:
Age 30 2.5 years
Age 40 3.1 years
Age 50 2.6 years
Age 60 1.6 years
*1985 Commissioners Individual Disability Table A
Disability buy-out
▪ Disability insurance can be used to fund a buy-out on the disability of a shareholder
▪ DI can provide a lump sum or monthly payments
▪ Various strategies using DI are available to fund a buy-out:
▪ Cross purchase
▪ Share redemption
Corporate redemption method
Build Me Inc.
Andrea Mark
Corporation owns insurance on each S/H
Insurance
50%50%
Build Me Inc.
Mark
100%
Andrea
Insurance
$$
Shares
$$
Corporate redemption method – after disability
Corporate Redemption method
▪ Tax treatment:
▪ Premiums paid directly by the corporation are a non-deductible expense
▪ Proceeds received by the corporation tax free
▪ Sale of shares results in a taxable deemed dividend to disabled shareholder
Next step…need income replacement policies…
Buy-Sell funding
▪ Build Me Inc. valued at $1,000,000
▪ Corporate Redemption method used
▪ $500,000 Lump-sum after 365 days
▪ Andrea = $3,065/yr.
▪ Mark = $3,450/yr.
▪ Total = $6,515
Mistake #2: Low Income Replacement Ratio
Solution: Income Loss Replacement Plan
▪ Group together individual policies
▪ Insuring salary/employment income only (employee benefit)
▪ Need at least 2 people
▪ Must cover everyone in the same class
▪ Tax-deductible business expense
▪ Benefits are grossed up because they are taxable
Income Loss Replacement Plan
Build Me Inc.
InsuranceInsurance
Insurance Employees
Board Resolution
Owner & Payor
New Income Replacement Ratio
Current income replacement ratio
▪ Andrea: 0%
▪ Mark: 0%
▪ John: 0%
Proposed income replacement ratio
▪ Andrea: $8,440/m = 81%
▪ Mark: $8,440/m = 81%
▪ John: $5,310/m = 85%
▪ Total cost of: $8,608/yr
Mistake #3 – Business Expenses not covered
▪ Owners have dual need:
▪ Income replacement
▪ Expense replacement
Personal Expense Business Expense
Mortgage Lease/Rent
Utilities Telephone
Groceries Advertising
Kids sports/activities Admin Salaries
Gas Leased equipment
Car (gas, insurance, etc.) Accounting Fees
Cell phones Business loan repayment
Office overhead DI coverage
▪ Corporation = owner, payor & beneficiary
▪ Reimburses expenses incurred or paid during disability period
▪ Premiums are deductible
▪ Benefits received are taxable
▪ Expenses incurred are deductible
▪ Ends up being a wash
Covered Overhead Expenses
Overhead DI
▪ $3,350 MEB each – 30 day EP, 12 m BP
▪ Total + Residual disability
▪ Tax-deductible business expense
▪ Mark = $881/yr.
▪ Andrea = $1,148/yr.
Summary
▪ Earned close to $20,000 in commission
▪ Premium commitment from the client was $17,152
▪ Received 7 referrals from these clients…
▪ Who do you know?
▪ What DI do you have in place for yourself?
Sales language
1. “ What is your executive compensation strategy for your key executives?”
2. “Do you have a shareholder agreement? Is it funded?”
3. “If you can’t go to work, how will you keep the lights on?”
▪ Opens the door for ILRP, BOE, BS+, Critical illness
▪ Group insurance opportunities – add a baseline of CI?
▪ Investment & Life insurance opportunities with key exec’s
Thank You!