©2004 gerald katz disability buy sell your pathway to greater commissions gerry katz, mspa, rhu,...
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©2004 Gerald Katz
Disability Buy Sell
Your Pathway to Greater Commissions
Gerry Katz, MSPA, RHU, ALHC, DABFEDisability Income Concepts, Inc.P.O. Box 266257Weston, Florida 33326877-776-3948 (Toll-Free)954-217-8241 [email protected]
National Association of Health Underwriters
©2004 Gerald Katz
TOTAL U.S. DI MARKETPLACE PENETRATION
Individual Disability 35 - 40%
Business/Office Overhead 25 - 30%
Buy-Sell Disability 12 - 15%
©2004 Gerald Katz
What Are The Chances Of Recovery?
If Disability Begins At Age
Chances The Disability Will Continue 5 More Years
32 38.5 %
42 45.3 %
52 51.6 %
Society of Actuaries Disability Tables
When Disability HasContinued 1 Year
©2004 Gerald Katz
What Are The Chances Of Recovery?
If Disability Begins At Age
Chances The Disability Will Continue 5 More Years
32 49.2 %
42 56.6 %
52 59.7 %
Society of Actuaries Disability Tables
When Disability HasContinued 2 Years
©2004 Gerald Katz
What is a Disability Buy Sell Agreement?
A legally binding written agreement between the owners of a business establishing the terms and conditions of the sale and
purchase of a disabled owner’s share of that business.
©2004 Gerald Katz
THE PROBLEM
Healthy Partner:
Is committed to building business or professional practice – using their talent, time and income. Will take calculated business risks to maximize profits.
Disabled Partner:
Worried if not “scared” about the future. Not willing to take any business risks and wants only to conserve the value of that business.
©2004 Gerald Katz
THE PROBLEMcont’d
Many small and medium size businesses today recognize the business implications of a premature death to an Owner-Employee.
Few businesses have provided for a Long Term Disability to the same Owner-Employee.
Their Buy-Sell Agreement is usually missing a page!
©2004 Gerald Katz
THE PROBLEMcont’d
When Disability Strikes
Can Owner-Employee return to productive work?
Will business continue on a profitable basis?
When Buy-Out is triggered, will the money be thereto purchase disabled owner’s share, at a guaranteedprice?
Where will the money come from?
©2004 Gerald Katz
THE SOLUTION
ESTABLISH A PROPERLY FUNDED DISABILITYBUY-SELL AGREEMENT
TO THE DISABLED OWNER: 1. Guarantees that business interest will be purchased at
specified price.
2. Allows disabled owner after purchase, to convert business value to cash.
3. No need for disabled owner’s family to be involved in the business to protect their interests.
4. Creates peace of mind about present & future needs.
©2004 Gerald Katz
Solutioncont’d
TO THE ACTIVE OWNERS: 1. Guarantees disabled owner’s interest is purchased at definite
price. 2. Guarantees active owners of continued control of business. 3. Gives active owners opportunity to replace disabled owner. 4. Guarantees active owners not forced into business with family
of disabled owner.
5. Guarantees continuity of business, maintains credit and employee morale.
©2004 Gerald Katz
Methods of Funding ABuy-Sell Agreement
1. Cash PaymentsCosts - 100¢
Ques: Can business afford large cash depletion? Will cash be required for other business needs?
2. Borrow Money Costs - 100¢
Ques: Is money available and at what interest rate? Is loan plus interest too costly to repay?
©2004 Gerald Katz
Methods of Funding ABuy-Sell Agreement cont’d
3. Establish Sinking FundCosts - 100¢
Ques: Will there be sufficient time to accumulate money? Are funds required for other business needs?
4. Paid from Future Business Earnings Costs - 100¢
Ques: Will earnings be sufficient? Will future earnings be needed for other purposes?
©2004 Gerald Katz
Methods of Funding ABuy-Sell Agreement cont’d
5. InsuranceCosts – Less than 100¢ after tax dollars
Answers: Cash available at time of need! Conserves owner’s capital! Insurance company determines disability! Business credit maintained! Budgeted premium payments! Other business assets maintained!
©2004 Gerald Katz
TYPES OF DISABILITYBUY-OUT AGREEMENTS
1. Entity Purchase Plan The business, whether a closely held corporation or partnership, purchases disabled owner’s interest. Note: Business is owner, premium payer and receives the benefits from
insurance policy.
©2004 Gerald Katz
ENTITY PURCHASE EXAMPLE
# 1 # 2 # 3 50% Owner 30% Owner 20% Owner
$800,000VALUE
ABCCORP.
PURCHASES
$400,000 Policy $240,000 Policy $160,000 Policy
on # 1 on # 2 on # 3
©2004 Gerald Katz
TYPES OF DISABILITYBUY-OUT AGREEMENTScont’d
2. Cross Purchase Plan Non-disabled owners purchase disabled owner’s interest. Note: Each stockholder/partner owns, is premium payer and receives benefits
from disability policy covering the other stockholder(s) or partners(s). When more than two insured’s are involved,a trusteed arrangement may be advisable.
©2004 Gerald Katz
CROSS PURCHASE EXAMPLE ABC Corp.
$800,000 VALUE
# 1 # 2 # 3 50% Owner 30% Owner 20% Owner
Purchases Purchases Purchases
$120,000 PolicyOn #2and
$80,000 PolicyOn #3
$200,000 PolicyOn #1and
$80,000 PolicyOn #3
$200,000 PolicyOn #1and
$120,000 PolicyOn #2
©2004 Gerald Katz
Typical Buy Sell
Disability Policy
& Underwriting
Requirements
©2004 Gerald Katz
FORMS OF DISABILITYBUY SELL INSURANCE POLICIES
A. Lump Sum Benefit Pay-Out
B. Monthly Benefit Pay-Out
C. Combination of A & B
©2004 Gerald Katz
Typical Policy (2)
Policy Design
Issue Ages: 18-57/60
EliminationPeriods(Trigger Point): 12 Mo., 18 Mo., 24 Mo., 36 Mo.
Minimum & Maximum Issue: $5,000 - $1,500,000 to
$2,000,000(usually limited to 100% ownership interest)
©2004 Gerald Katz
Typical
Policy (3)
Pay-Out Periods:
1. Lump-Sum Paid in Full After Trigger Point
2. Monthly Installments 12 Months to 120 Months Installments
©2004 Gerald Katz
TypicalPolicy (4)
3. Combination of 1 and 2
Initial “Down-Payment” Plus Installment Period
OR
“Flexible Funding” – Up To 10 Yrs. Pay-Out
Usual No.of Insured’s: Usually Limited to 10
Limited Options Available
©2004 Gerald Katz
Typical Policy (5)
UnderwritingRequirements:
A. Executed Buy Sell Agreement usually necessary before company issues
B. Must specify Definition of Total Disability
C. Trigger Point for Benefits
D. Formula or Method to Calculate Purchase Price
E. Commencement Date of Agreement
F. Insurance Company usually requires 1-2 years Balance Sheet and Profit & Loss Statements
©2004 Gerald Katz
G. All owners must usually apply for coverage. H. Buy Sell coverage usually limited to full-time Owner-Employees. I. Executed Buy Sell Agreement or Proof of Sale needed at claim time. NOTE: There must be an obligation never an option to buy and to sell insured’s entire business interest at trigger point.
Typical Policy (6)
UnderwritingRequirements (cont’d):
©2004 Gerald Katz
Disability Buy SellValuation Formulas
I. Professional Corporations
100% of Net Worth+
1 Times Salaries or Income of Owners/Partners
(Not to Exceed Specific Maximum)
OR
1 ½ - 2 Times Salaries orIncome of Owners/Partners
(Not to Exceed Specific Maximum)=
Value of Professional Service Corporation
©2004 Gerald Katz
II. Commercial Businesses
A. Net Value Method
100% of Net Worth
OR
1 – 1-1/2 Times Salary or Gross Income of Owners/Partners
=
Value of Business Organization
Valuationcont’d
©2004 Gerald Katz
B. Capitalization of Earnings Method
4 - 8 Times Net Earnings
(Depending Upon Length of Business ExistenceAnd Growth of Earnings)
=
Value of Business Organization
Valuationcont’d
©2004 Gerald Katz
Problem With Using Traditional Disability Income Insurance Policy To Fund Buy Sell Agreement
They are designed to provide personal income to purchase food, clothing and other necessities of life. They cannot also provide additional benefits to complete Buy Sell agreement. What happens if disabled insured recovers after buy sell is triggered? Burden of remaining payments shift to business and active owners. Amount of coverage available is limited to normal issue and participation limits and is based on insured’s income, not value of business interest.
©2004 Gerald Katz
TAXATION OF DISABILITYBUY SELL PLANS
Premiums: Not deductible by either corporation or partnership
(IRC Sec. 265)
Benefits: Received income tax-free(IRC Sec. 104(a)(3)
NOTE: Disabled Owner-Employee is taxed only on the gain from sale of business interest. May qualify for installment sale tax treatment if at least one payment is received by seller after close of tax year.
©2004 Gerald Katz
Prospecting For Disability Buy Sell Clients & Sales
1. Look for closely held small corporation or partnerships with 2-5 active working owners.
2. Firms should be profitable business in existence at least two to three years.
3. For professional corporations (physicians,
dentists, attorneys, CPA’s, etc.) they generally do not have to be in business more than one year.
4. Do not prospect in “mom & pop” business arena
or in “blue-collar” businesses. They generally are not offered buy sell.