©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 Faxwww.disabilityconcepts.comdisability@disabilityconcepts.com

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.