June 2009 - Bill Murray


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June 2009 - Bill Murray

  1. 1. Susan Charara Regional Manager, Living Benefits Living Benefits Solutions for Small Business Owners
  2. 2. Agenda <ul><li>Disability solutions for business owners </li></ul><ul><li>Why group LTD often isn’t enough </li></ul><ul><li>Salary Continuation Plans </li></ul><ul><li>Business Overhead expense </li></ul><ul><li>Critical Illness Insurance </li></ul><ul><li>Split-Dollar arrangements </li></ul>
  3. 3. Statistics <ul><li>In 2006, self-employed workers represented around 15% of all employed workers in Canada </li></ul><ul><li>Nearly 1 in 6 workers are self-employed </li></ul><ul><li>Only 40% of self-employed workers have disability insurance (either group or individual) </li></ul><ul><li>Source: Statistics Canada, Labour Force Survey, April 2007 . </li></ul>
  4. 4. <ul><li>For most small and medium sized businesses, the success rests on the shoulders of its owner </li></ul><ul><li>If the owner’s heath took a turn for the worse, what happens then? </li></ul><ul><ul><li>The business is the owner’s source of income </li></ul></ul><ul><ul><li>Business expenses still need to be paid </li></ul></ul><ul><ul><li>Customers still need to be looked after </li></ul></ul>
  5. 5. Business Owners <ul><li>their greatest </li></ul><ul><li>financial vulnerability is </li></ul><ul><li>changes to their health ! </li></ul>
  6. 6. Machine #1 <ul><li>This machine works: </li></ul><ul><li>8 hours per day </li></ul><ul><li>5 days per week </li></ul><ul><li>48 weeks per year </li></ul>We don’t expect this machine to work these hours for 30+ years without breaking down?
  7. 7. Machine #2 <ul><li>Business Owners: </li></ul><ul><li>10-16 hours per day </li></ul><ul><li>6-7 days per week </li></ul><ul><li>48-50 weeks per year </li></ul>Would you expect this machine to work these hours for 30 years without breaking down?
  8. 8. DI Solutions for Business Owners <ul><li>Worker’s Compensation </li></ul><ul><li>Canadian Pension Plan </li></ul><ul><li>Group Long-Term Disability </li></ul><ul><li>Individual Disability Insurance </li></ul>
  9. 9. WCB <ul><li>Protects against injury that occurs on the job </li></ul><ul><li>Sickness is usually not covered </li></ul><ul><li>Any occupation mandate; mandatory rehabilitation </li></ul>
  10. 10. CPP <ul><li>Restrictive Definition: disability must be “ severe and prolonged and ultimately result in death” </li></ul><ul><li>4 month waiting period </li></ul><ul><li>Maximum benefit is $1010 /month (taxable) </li></ul>
  11. 11. Group LTD <ul><li>Group Long Term Disability is designed to cover the SALARIED employees </li></ul><ul><li>As most employees only have one source of income, it is designed to replace that income or rehabilitate the employee in another occupation </li></ul>
  12. 12. Group LTD <ul><li>Where does it fall short? </li></ul><ul><ul><li>Only covers one source of income: T4 income </li></ul></ul><ul><ul><li>Definition of disability is more restrictive </li></ul></ul><ul><ul><li>Partial disability is usually not included </li></ul></ul><ul><ul><li>Benefit amount is not guaranteed </li></ul></ul><ul><ul><li>Usually includes a maximum benefit amount </li></ul></ul>
  13. 13. Sources of Income <ul><li>Group LTD coverage covers T4 income. Most incorporated business owners have other sources multiple income including: </li></ul><ul><ul><li>T4 income </li></ul></ul><ul><ul><li>Bonus income </li></ul></ul><ul><ul><li>Corporate profits </li></ul></ul><ul><ul><li>Income splitting </li></ul></ul>
  14. 14. Definition of Disability <ul><li>Most group LTD plans cover total disability only, which in most cases is adequate for employees </li></ul><ul><li>Business owners have more vested in the business, therefore, if they were to become disabled and could work on a limited basis or in a limited capacity , they probably would </li></ul>
  15. 15. Benefit Amount <ul><li>Group LTD is financially underwritten at time of claim ( benefit amount is not guaranteed ) </li></ul><ul><ul><li>If the owners income has gone down, the benefit paid will reflect the change in income </li></ul></ul><ul><li>Group LTD usually includes a “maximum” benefit </li></ul><ul><ul><li>If the owner’s income requires a benefit amount in excess of the maximum = under insured </li></ul></ul>
  16. 16. Individual LTD <ul><li>Covers most sources of net income </li></ul><ul><ul><li>T4 income </li></ul></ul><ul><ul><li>Spousal splitting of income </li></ul></ul><ul><ul><li>Corporate profits </li></ul></ul><ul><li>Will not hinder a business owner’s desire to work </li></ul><ul><ul><li>Total vs. partial/residual disability </li></ul></ul><ul><li>Includes contractual guarantees </li></ul><ul><ul><li>Guaranteed premiums / benefit amount </li></ul></ul>
  17. 17. Individual DI Solutions for Business Owners <ul><li>Business owners can either: </li></ul><ul><ul><li>“ Top-up ” their group LTD coverage to help offset gaps in such coverage </li></ul></ul><ul><ul><li>“ Carve-out ” of the group LTD plan and replace with individual LTD coverage </li></ul></ul>
  18. 18. <ul><li>Can business owners </li></ul><ul><li>purchase individual DI and </li></ul><ul><li>deduct the premiums? </li></ul>
  19. 19. Salary Continuation Plan <ul><li>What it is? </li></ul><ul><ul><li>It is a method of grouping individual disability policies whereby the premium is paid by the employer and is considered a tax-deductible business expense </li></ul></ul><ul><ul><li>Benefits received are taxable in the hands of the insured </li></ul></ul><ul><ul><li>Benefit are increased to help offset the taxes </li></ul></ul>
  20. 20. Salary Continuation Plan <ul><li>How it works </li></ul><ul><ul><li>Must include at least 2 employees </li></ul></ul><ul><ul><li>Can be offered to all employees or a class of employees </li></ul></ul><ul><ul><li>Coverage must be offered to all employees within the class </li></ul></ul>
  21. 21. Personal vs. Business Needs <ul><li>Most business owners believe that adequate personal DI coverage is enough .. </li></ul><ul><li>Things to consider: </li></ul><ul><li>What about the business? </li></ul><ul><li>If the owner is not actively working, is this likely to impact revenues? </li></ul><ul><li>If revenues decrease, how will this impact the “financial health” of the business? </li></ul>
  22. 22. Business Owners <ul><li>The needs of business owner are two-fold: </li></ul><ul><li>Personal DI Protection </li></ul><ul><ul><li>Used to help replace the owner’s income </li></ul></ul><ul><li>Business DI Protection </li></ul><ul><ul><li>Used to cover off fixed business expenses </li></ul></ul>
  23. 23. Business Overhead Insurance <ul><li>Protects the business, by providing a benefit to cover off business expenses (anywhere from 6 months up to 2 years) </li></ul><ul><li>Ensures the business survives the disability too ! </li></ul><ul><ul><li>Avoids liquidation of assets </li></ul></ul><ul><ul><li>Prevents a fire-sale situation </li></ul></ul><ul><ul><li>Maintains locations and current staff </li></ul></ul>
  24. 24. Critical Illness Insurance <ul><li>About 20% of DI claims are for heart disease & cancer </li></ul><ul><li>1 in 2 men and 1 in 3 women will develop heart disease in their lifetime </li></ul><ul><li>39% of women and 45% of men will develop cancer during their lifetime </li></ul>
  25. 25. Why both? <ul><li>Critical Illness Coverage </li></ul><ul><li>Cancer </li></ul><ul><li>Heart Attack </li></ul><ul><li>Stroke </li></ul><ul><li>- - - - - - - - - - - - - - - </li></ul><ul><li>30 day waiting period </li></ul><ul><li>- - - - - - - - - - - - - - - </li></ul><ul><li>Claim based on </li></ul><ul><li>DIAGNOSIS of CONDITION </li></ul><ul><li>Disability Coverage </li></ul><ul><li>Cancer </li></ul><ul><li>Heart Attack </li></ul><ul><li>Stroke </li></ul><ul><li>- - - - - - - - - - - - - - - </li></ul><ul><li>90 Day waiting period </li></ul><ul><li>(typically) </li></ul><ul><li>- - - - - - - - - - - - - - - </li></ul><ul><li>Claim based on </li></ul><ul><li>ABILITY TO WORK </li></ul>
  26. 26. <ul><li>Can business owners </li></ul><ul><li>purchase individual CI and </li></ul><ul><li>deduct the premiums? </li></ul>
  27. 27. Grouped CI <ul><li>What it is? </li></ul><ul><li>It is a method of grouping individual critical illness policies whereby the premium is paid by the employer and is considered a tax-deductible business expense </li></ul><ul><li>Benefits received may be tax-free* </li></ul>
  28. 28. Tax Treatment <ul><li>CI benefit may be tax-free </li></ul><ul><ul><li>Provided the policy is accident & sickness insurance for tax purposes </li></ul></ul><ul><ul><li>The CRA generally accepts that CI policies providing no ROP benefits are accident & sickness </li></ul></ul><ul><ul><li>The CRA has not provided its view regarding tax-treatment of CI policies containing ROP benefits </li></ul></ul>
  29. 29. Split-Dollar Arrangements <ul><li>If policies include an ROP benefit, it is often recommended that a split-dollar arrangement be utilized </li></ul><ul><li>The premiums for the policy are paid by the employer and the premiums for the ROP benefit are paid by the insured </li></ul><ul><li>The CRA has not provided its view regarding tax-treatment of CI policies containing ROP benefits </li></ul>
  30. 30. <ul><li>Any Questions? </li></ul>