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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!