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!