Living Benefits Business Solutions Reducing the financial risk of disability

What are the odds of disability? Number of Business Owners Age (23)80 (32)88 (40)93 (48) 3563 (22)78 (31)86 (39)92 (47) 4060 (21)75 (30)84 (38)90 (45) 4555 (20)70 (29)80 (37)87 (43) 5049 (19)63 (27)74 (34)81 (40) (probability of death in brackets) Source: 1985 Commissioner’s Disability Table A (Experience Table) CIA Aggregate Mortality Table The % probability of at least one long-term disability lasting at least 90 days before age 65

How long do disabilities last? Age% Disabled Average duration 2544%2.4 years 3042%3.2 years 3540%3.4 years 4037%3.9 years 4533%4.2 years 5028%4.7 years Percentage of people who will become disabled for at least 90 days prior to age 65 and average duration of disability Source: 1985 Commissioner’s Disability Table A (CIDA), blended 50/50 male/female and 50/50 accident/sickness

What are the chances of being disabled for life? AgeMaleFemale %4.18% %15.44% Chances of being disabled for life if already disabled at least 90 days. Source: 1985 Commissioner’s Disability Table A (Experience Table)

Expenses continue Disability and your business – revenue and expenses $ Days Savings / Revenue Onset of Disability

Disability and your business – workload and staff Workload continues Staffing decreases Knowledge, expertise and goodwill decrease

Disability and your business – decision making ? Owner 2 Owner 1 Disabled owner

Disability and your business – new conflicts of interest Disabled Owner BusinessSuppliersCreditorsRecoveryFamilyClients Other owners Employees Where will the money come from? Who decides when the owner is permanently disabled? Will the owner relinquish his/her interest in the business?

Small Consulting Firm Inc. Small successful consulting company Three founding shareholders - one diagnosed with brain tumour Treatment involves chemotherapy, radiation and surgery Recovery and possible complications uncertain Disabled owner wants to stay involved Clients and creditors lose confidence

Small Consulting Firm Inc. Business losing money – need to cut salaries. Who to cut? Six months later, other owners want to move on. Owners discuss purchase and disabled owner not willing to take reduced purchase price. Call the bank for loan to buy out - disabled owner a major concern. Not granted.

Small Consulting Firm Inc. One year later – have hired replacement. At 18 months, business back on track. At two years, owner still disabled. Business making profit. Wants to hold interest. Disabled owner’s family financially challenged. Wants full value + of ownership. Threatening, but can’t afford legal action. What can they do? How?

Fair market value “The amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.”* *Black’s Law Dictionary, sixth edition

Disability and your business – choices you must make 1.Do nothing 2.Dissolve the business 3.Buy out the disabled owner’s share i. When? ii. How much? iii. Where will you get the money? a.Cash flow? b.Loan? 4.Insurance funded buy/sell agreement.

Disability insurance buy/sell plan Protection against potentially costly and unproductive drain on the business with a fixed business expense Suppliers and creditors may be reassured - business owners have a plan with appropriate funding Demonstrates sound business management and may help attract quality employees

Disability insurance buy/sell plan Can provide disabled owner fair market value for their share of business Policy wording provides clear definition of disability 365 or 720 day waiting period

Some Disability Buy/Sell structures – purchase by business Owner Business Disabled owner Disabled owner Canada Life $ $ Shares / ownership interest

Some Disability Buy/Sell structures – cross purchase Owner Business Disabled owner Disabled owner Canada Life $ $ Shares / Ownership interest

Some Disability Buy/Sell structures – trust Owner Business Disabled owner Disabled owner Canada Life $ Shares / Ownership interest Trustee $ Owner

DI Buysell Structure - Considerations Capital Gain/Loss on sale Capital Dividend Account not available Adjusted cost base Premium imbalance

What are the costs? Buy/Sell PlanMonthly PremiumPotential Financial Impact of Disability John, 40 years old. $250,000 Buy/Sell Plan, 365 Day Waiting Period $118.40Salary to disabled owner $100,000 Jane, 40 years old. $250,000 Buy/Sell Plan, 365 Day Waiting Period $158.90Business valuation$15,000 Legal and accounting fees $10,000 Lost revenue$150,000 Lost market value of business $250,000 Total $ Total $525,000 Source: Canada Life Buy/Sell Plan premium. Occupation class 5 non-smokers. (Zoom 9.1)

The Solution Disability insurance funded buy/sell agreement Non-cancellable buy/sell funding Clear definition of disability Third party to decide disability, triggering agreement Minimize disputes among shareholders / partners

Additional considerations Maximum buy/sell coverage is $1,000,000 per business owner What can you do when value of Individual ownership interest exceeds $1,000,000?

Possible solution Critical illness funded buy/sell agreement Coverage up to $2,000,000* Note – technical considerations of agreement may be different from disability buy/sell Payment at 30 days from diagnosis, not 365 or 720 days Structural considerations may vary, terms need to be negotiated between the parties *Subject to underwriting. Other inforce disability or critical illness coverage would be considered in determining how much additional coverage is available.

Business Expenses Personal Expenses Disability and your business – covering the risks $ Days Savings / Revenue Onset of Disability Salaries, rent, phones, leases, interest, legal fees, accounting fees, business taxes, utilities, business insurance… Mortgage, groceries, vehicles, clothing, utilities, taxes, monthly bills, medical expenses.. Overhead Expense Plan Key Person Plan Individual Disability Buy / Sell lump sum Business expenses STOP Business expenses STOP Personal expenses continue Personal expenses continue Critical Illness lump sum

The Big Picture Individual Disability Buy / Sell Lump Sum Overhead Expense Plan $ Business liabilities STOP Business liabilities STOP Personal liabilities continue Personal liabilities continue Keyperson Plan Critical Illness lump sum Days Savings / Revenue Onset of Disability

Keyperson Disability Reimbursement Plan Source: Canada Life Keyperson Plan

Keyperson Disability Reimbursement Plan Loss of Key Employee Potential Financial Impact of Disability to Employer: Lost Revenue Increased Expenses Recruitment costs to find replacement Source: Canada Life Keyperson Plan

Keyperson Disability Reimbursement Plan Loss of Key Employee Potential Financial Impact of Disability to Employer Key Employee No more than 10% ownership share Lost Revenue Monthly Benefit Increased Expenses Recruitment costs to find replacement Benefit Period: 12 Months Waiting Period: 30 Days Premium paid by: Employer Benefit payable to: Employer Source: Canada Life Keyperson Plan

Business Needs: Living Benefits Individual Disability Income Personal expenses (monthly income replacement) Overhead Expense Reimbursement of business expenses DI Buysell Funding for disability buyout agreement Keyperson Disability Reimbursement Monthly benefit to help company adjust to loss of key person ‘Grouped’ Critical Illness Individual CI plans for 2+ employees Wage Loss Replacement Plan Individual DI for 2+ employees

Living Benefits: Smoker? How many: Cigars? Cigarillos? How much: Chewing tobacco?

Turn a smoker into a non-smoker For DI and CI only Must not have smoked cigarettes or used marijuana within the past 12 months All other forms of tobacco use will be considered non- smoker No quantity limitations Cigar, pipe, cigarillos

“Premier Value” Premium Reduction: 10% Employees or active owners of the same business or professionals sharing office space and expenses At least 3 applications must be submitted at the same time

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