The ABC’s of DI

1. The ABC’s of DI

2. THIS PRESENTATION Provides Accurate and Authoritative Information Content Accuracy is not Guaranteed Does not Render Legal, Accounting, Tax or other Professional Services If legal advice or other expert assistance is required, the services of a competent professional should be sought.

3. Why Disability Income Protection? • Your Clients Need the Protection • Effect on the Family • Effect on the Client • Effect on Society • According To The U.S. Housing Authority • Mortgage Foreclosures - 48% Due To Disabilities • Potential Effect On Small Business And Employment

4. Are You Protecting the Right Assets? Potential Earnings to Age 65 With 5% Annual Salary Increase ANNUAL SALARY Age 30 35 40 45 $50,000 $4,516,000 $3,322,000 $2,386,000 $1,653,000 $100,000 $9,032,000 $6,644,000 $4,773,000 $3,307,000 $150,000 $13,548,000 $9,966,000 $7,159,000 $4,960,000

5. Chances of a Disability Chances of Having at least one Long-Term Disability, lasting 3 Months or longer, before reaching Age 65 Age 25 35 45 55 Probability 44% 41% 36% 27% Source: 1985 CIDB Disability Tables, 1980 CSO

6. Chances of a Disability Chances of being Disabled for life if the Disability lasts for more than 3 Months Age 25 35 45 55 Lifetime Disability 25% 28% 33% 40% Source: 1985 CIDB Disability Tables, 1980 CSO

7. Types of Disability Income Insurance • Noncancelable • Guaranteed Renewable • Noncancelable and Guaranteed Renewable • Conditionally Renewable

8. Understanding the Basics • Benefit Period • How Long Benefits Will Be Paid • Elimination Period • How Long the Insured Waits • Benefit Amount • The Monthly Benefit Payable Under a Total Disability • Occupation Class • Risk Class Affecting Benefits & Premium

9. COMMON DEFINITIONS OFTOTAL DISABILITY • Pure or True Own Occupation • Cannot perform the Substantial & Material duties of Occupation • 2 years, 5 years to age 65/67 • Your Occupation • Cannot perform the Substantial & Material duties of Occupation; and • Not Working in Another Occupation The Cornerstone of the DI Policy

10. Any Reasonable OR Gainful Occupation • 24 or 36 Month Own Occupation Period • Insured is Reasonably Fitted • Education • Training • Experience • Income Qualifier • 50%-60% of Pre-disability Earnings

11. COMMON DEFINITION OFRESIDUAL DISABILITY • Loss of Income • Loss of Time or Duties • % Income Lost=% Income Paid • Partial Disability • 50% Benefit • 6 or 12 Months

12. PREDISABILITY EARNINGS • Gross Income Less Expenses • Cash or Accrual Basis • Calculated As Average • 12 Months • Last 24 Months • Highest 2 of Previous 5 Years • Simple or Compounded Basis

13. INDEXING EXAMPLE Assuming 50% Loss of Income and $5,000/Month Benefit • $100,000 Indexed over 10 Years • 5% Compounded = $162,889 • $50,000 Income • = $81,444 = 50% • $2,500 Monthly Benefit • $100,000 Indexed over 10 Years • 5% Simple = $150,000 • $50,000 Income • = $81,444 = 54% • $2,300 Monthly Benefit

14. COMMON DEFINITION OFACCIDENT OR ILLNESS • Accident • Directly & Independently of All Other Causes • Accidental Event • Bodily Injury • Illness • Commences after Effective Date • Manifests itself after Effective Date

15. GROUP LONG TERM DISABILITY • Myth: It’s Cheaper Because it’s Group • More Conservative Benefits • Pre-Existing Condition Limitations • Shorter Duration • Less Adverse Selection • Premiums/Benefits can be Modified • Plans can be Cancelled

16. WHY SUPPLEMENTAL GROUP LTDWITH INDIVIDUAL POLICIES • Benefits too Low • May Discriminate • Rates Not Guaranteed • Not Portable • Conservative Definitions • Bonus/Pension not Covered • Group Plans are offsetting Individual Policies • Your Client Needs It • You are in Business for Yourself

17. PAYROLL DEDUCTION • The Employees Need It • Benefits of Group LTD • Guaranteed Issue • Minimum Participation • Inexpensive • Higher Participation • Benefits to Individual • Supplements the LTD • Portable with Discounts • Direct Billed

18. COMMON OPTIONAL RIDERS • Cost of Living Benefits • Future Insurability Benefits • Automatic Increases • Premium Refund • Catastrophic Benefits • Long Term Care Conversion • Variation and State Availability

19. COST OF LIVING BENEFITS • Benefit Increases on Anniversary Date • Compounded or Simple • Minimum Benefit of 3%-4% • Overall Cap of 2X Monthly Benefit

20. FUTURE INSURABILITY BENEFITS • Benefit Increase without Medical Re-Qualification • Annually • Bi-Annually • Every 3rd Anniversary Date • Expires between Age 51 and 55 • Cap on Total Benefits

21. CATASTROPHIC BENEFITS • Qualifying Definitions • 2 of 5 Activities of Daily Living • Presumptive Disability • Loss of • Speech • Hearing • Sight • Use of any Two Limbs • Increase Monthly Benefit or Extend Benefit Period

22. RETURN OF PREMIUM • Client Pays an Extra Premium • Receives % of Premium • After X Years • Claim Benefits Paid First • Come out of Return of Premium Benefit

23. 8 Year Premium Refund Option PRO Refund* Without PRO With PRO Without PRO With PRO Annual Premium Net Cost over 10 yrs. *Example of Principal Life Insurance Company’s Premium Refund Option (PRO) rider with an 8 year payment term with 4 years premium refunded and no claims

24. OCCUPATION CLASSES • Insuring Duties, Not Job Titles • What is the Client’s Day Like? • Manual Duties? • What Are They? • Represent What % of Time? • Ownership? • Employees? • Affects Costs and Benefit

25. TAX CONSEQUENCES • Premiums Paid with Pre-Tax Dollars • Taxable • Premiums Paid with After-Tax Dollars • Tax Free • More than 2% Ownership cannot deduct Premiums • Partnerships • S-Corps • LLC’s • Which is Better? • Depends on Marginal Tax Rate

26. TAX CONSEQUENCES EXAMPLE • $100,000 Income • $4,800 Tax Free or • $5,950 Taxable • 28% Marginal Tax Bracket • $4,800 Income Tax= • $6,666 Gross Monthly Income • No FICA paid after 6 Months

27. MEDICAL UNDERWRITING • Common Concerns • Musculoskeletal • Mental/Nervous/Drug/Alchohol • Stress/Anxiety Counseling • Diabetes • Blood Pressure • Cholesterol • Attending Physician Statements • Blood • Urinalysis

28. FINANCIAL UNDERWRITING • Client’s Net Income • After Business Expenses • Income History • Bonuses • Pension Contributions • Tax Returns • All Schedules for Business Owners • Unearned Income

29. DISABILITY OVERHEAD EXPENSE

30. HOW DOES IT WORK? • This is a Reimbursement Policy • Client Purchases a “Pot of Money” • Carry Forward Provision • Possible Limitations • Total Number of Months Benefits will be Paid

31. WHAT IS COVERED? • Normally Deductible Business Expenses • Utilities • Rent • Insurance • Taxes • Office Expenses • Employee Salaries • Not in the Same Occupation as Owner • In the Same Occupation by Rider

32. TAXATION • Premiums are Tax Deductible • Received Benefits are Taxable • Write Off for Incurred Expenses • Taxation a Wash

33. DISABILITY BUY-OUT INSURANCE

34. HOW DOES IT WORK? • Reimburses the Non-Disabled Stockholder or Entity to Buy Out the Disabled Stockholder • Premiums are not tax Deductible • Benefits Received Tax Free • May be a Taxable Event • When Buy-Out Executed by Entity

35. ADVANTAGES FOR THE DISABLED OWNER • Assures a Definite Price and Buyer • Mutual Terms • Firm can Meet the Buyout Commitment • Family Members can Care for the Disabled • Business is Protected • Provides Cash for Disabled Care

36. ADVANTAGES FOR THE ACTIVE BUSINESS OWNERS • Assures: • A Predetermined Price • A Predetermined Time Frame • Business Continuity • Owners Retain Control • Competitors Unable to buy any interest in the Firm

37. HOW DOES THE POLICY PAY? • Definition of Disability • Own Occ As Long as not Working in the Company • Total Disability Only • 12/18/24 Month Waiting Period • Payments • Lump Sum • Monthly Funding • Combination

38. WHO ARE THE LIKELY PROSPECTS? • Client Understands the Need • Ability to Earn an Income • Age 30-45 • Premium at 2% or Less of Gross Income • Healthy

39. SELLING THE PLAN • Discuss Life while Disabled • Sell the Benefits • Sell the Price • Be Creative

40. Thank You