Make Business Your Business

1. Make Business Your Business with Disability Income Insurance

2. This presentation is believed to provide accurate and authoritative information in regard to the subject matter covered. The accuracy of the content is not guaranteed, and it is provided with the understanding that Principal Life Insurance Company is not rendering legal, accounting, tax or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

3. Why Should You Sell DI in the Business Market? Advantages to YOU: • Market potential • Income potential • Needs based selling • More Underwriting Options

4. Why Should You Sell DI in the Business Market? Advantages to EMPLOYERS: • Tax efficient • More Economical • Meet the needs of the individual and the entity

5. The only thing worse thanhaving to work for a living is not being able to.

6. What are the odds in one year? Life’s Risks: What are the odds in oneyear? Fire 1 in 222 Homes catch fire (reported to Fire Dept.) Auto Accident 1 in 160 People suffer bodily injuries in auto accidents Death 1 in 117 People die Disability 1 in 10 Primary income earners become disabled Source: 1994 Statistical Abstract of the United States

7. The odds are, one key person will become disabled... Chances of a Disability Lasting 3 Months or Longer (before age 65) Total Number of Employees Age 2 Employees 5 Employees 10 Employees 27 66.3% 93.4% 99.6% 37 62.4% 91.3% 99.2% 47 54.4% 85.9% 98.0% 57 35.4% 66.4% 88.7% Based on 1985 Commissioner’s Individual Disability Table B - Equally Weighted 90 Day Elimination Period

8. Formal Salary Continuation Plan (QSPP) • Objectives of tax favored salary continuation plans must include providing benefits for the employees of a business • Governed by Sections 105, 106 and 162 of the Internal Revenue Code

9. Without a plan, the business: • May lose the tax deduction for payments made to a disabled owner or employee • Must decide who is and isn’t disabled • Must decide how much and how long to pay benefits

10. Requirements of the QSPP • Must be in writing before the date of disability • Cannot be for the benefit of only the stockholders • Must be communicated to those covered • Must define who is covered • Must define when benefits begin and under what conditions

11. Five Key Questions • How will the plan with benefits be funded? • How do you feel about administration of your employee benefit programs? • Who will be covered? • Will the employer pay all or a portion of the premiums? • How does employer or employee wish to allocate tax consequences on benefit payments?

12. Disability Income Insurance isthe Solution! • Helps attract and retain quality employees • Offers permanent, portable coverage • Reinforces value of employee • Premium payments are tax deductible and guaranteed • Defines disability • Defines benefit amount and benefit period

13. Income Replacement • 50% - 80% of gross earnings • The lower the income, the higher the income replacement

14. Disadvantages of Group LTD: • Benefit too low, may discriminate • Taxable benefits • Usually not portable • Conservative definitions • Rates not guaranteed

15. Insurance Company Employer Premium Payments Taxable Bonus (deductible to business as salary expense) Income Tax-free Disability Benefit Employee (Policyowner) Executive Bonus: Here’s how it works

16. Disability Premium 1 - Employee Tax Rate Double bonus can reimburse the employee for tax consequences of the taxable bonus used to pay the premium

17. Executive Bonus Programs • Tax deduction to employer • Select employees • Current tax on bonus to employee • Income tax-free benefit to insured • No formal plan administration

18. Split Dollar Programs: Split by • Percent of premium • Benefit amount • Benefit period • Elimination period • Riders

19. Case Study #1Computer Business • Business three years old • Mostly computer programmers/analysts • Broker just wrote health insurance • Interested in quality, portable protection • Willing to pay $25-$50 per month

21. Solution • Split Dollar DI • Employer to purchase $1,000/mo; 90 day wait; 5 year benefit period • Submitted as Guaranteed Acceptance Plan offer - offer matches employer paid portion of benefit with option to rate & rider

22. Solution • Each employee has chance to buy maximum benefits w/COLA if available • Additional coverage purchased to be paid via payroll deduction (we calculated cost of coverage per pay period)

24. Split Dollar • How the program is split determines the tax consequences of premiums and benefits • Proper documentation and support are key to a successful program

25. Case Study #2Multi-Specialty Medical Associates • 55 employee practice separating from hospital • Current benefits provided by the hospital • Wanted to match current benefits • Current plan offers 60% to $5,000 per month - LTD only provided by the employer • Concerned that when they announced the separation from the hospital they might lose employees if benefits are not attractive

29. Disability Buy-Out Funding

30. Advantages for the Disabled Owner • Assures a definite price and buyer under mutually agreed upon terms • No need for the firm to worry about its ability to meet the buy-out commitment • Family members can place their efforts on meeting the needs of the disabled owner rather than protecting the business • Provides extra cash to meet the needs that a disabling condition can generate

31. Advantages to the Active Business Owners • Assures they can buy out the disabled owner at a predetermined price at pre-arranged time after disability strikes • Customers, creditors and employees are assured of business continuity • Active owners retain control of the business rather than the disabled owner’s family members • Competitors cannot buy the disabled owner’s business interest in the firm and force out the active owners

32. Markets • Small businesses of five or fewer owners • Usually at least 10% ownership to be considered • Need to have a plan for succession • Have considered funding with insurance • Excellent Prospects - Law firms, CPA firms, physician practice, travel agencies, computer/software companies, distribution companies, engineering companies, architectural firms

33. Tax Consequences* • Premiums are not tax deductible, therefore benefit flows to the nondisabled entity income tax-free • With transfer from the nondisabled owner to the disabled owner there may be a capital gain if the payment is more than the original basis • Part of the payout can be structured as a noncompete or severance pay which will be viewed as tax deductible *Client should consult a tax advisor

34. Program Designs • Cross Purchase • Works best with two or three owners • The insurance company reimburses the nondisabled owner/individual • Advantage is to avoid alternative minimum tax ramifications • Entity Purchase • The insurance company reimburses the corporate entity • Best used with multiple owners

35. How Does the Typical Policy Pay • Common definition of disability • Own Occ as long as you are not working in the company • Total disability only • 12, 18 or 24 month waiting period • Payouts can be made in a lump sum, monthly funding or a combination of the two

36. Lump Sum Benefits • Tax ramifications to the business and owners should be considered • Alternative 10 year payout is available • Premium structure is most expensive because the insurance company is committed to paying 100% of the proceeds

37. Monthly Payout • Tax ramifications for the insured - may be lower taxes with a 24, 36, or 60 month payout* • Lower premium results results due to the insurance company retaining the assets longer (longer claim payout period) and may not have to pay out the entire benefit* • Special Death Benefit *Client should consult tax advisor

38. Common Additional Features • Legal Fee Benefit - reimburses between $2,000 and $3,000 of legal fees to exercise the agreement • Reduction of benefits at age 60 - 20% reduction through age 64 • Future Insurability - allows the business to increase the value of the policy without medical insurability

39. DBO Underwriting Common valuation methods for DBO underwriting: • Personal Service Business • 2 times income plus the retained earnings of the business • Manufacturing • Book Value plus the capitalization of excess earnings • Most companies will insure up to $1.5M of value

40. Business Overhead Expense Protection

41. What does it do? • Reimburses the disabled business owner(s) for his/her share of the normally tax deductible business expenses incurred • Examples: • employee salaries - interest • rent - depreciation • utilities - equipment lease • insurance - subscriptions

42. Policy Design • 30, 60, 90 day waiting periods • 12, 18 or 24 month benefit periods • Residual • Future insurability benefits • Same occupation salary rider

47. Buy Out Premium Comparison

48. Buy Out Premium Comparison

49. BOE Premium Comparison

50. All you need now is a stack of prospects... • Existing clients • Referrals • Business owners