Financial Underwriting Financial Underwriting Beyond the FormulasBeyond the Formulas

John Valickus FALU, FLMI, CLUJohn Valickus FALU, FLMI, CLUDivisional Chief UnderwriterDivisional Chief Underwriter

Lincoln Financial GroupLincoln Financial Group

Agenda – Beyond the FormulasAgenda – Beyond the Formulas•Focus on 4 Primary Financial Scenarios

•Key Person

•Income replacement

•Buy–Sell

•Estate Planning

•Three Case Clinics Per Scenario

•Prerequisite we have audience participation and fun

Key Person CoverageKey Person Coverage

Parameters of the Key PersonParameters of the Key Person

•Vital to the success of the company

•Success depends on the expertise the person brings to the company

•Recognition / reputation in the industry

•What are the qualities that person brings to the company

•Income

•Bonuses

•Stock Options

•Benefits

Key Person Coverage Key Person Coverage Historically based on a factor of…Historically based on a factor of…

Other Factors to Consider on the Key Other Factors to Consider on the Key PersonPerson

•Experience in the Industry

•Stage of the organization… Developmental, Growth, Maturity, etc

•Money reinvested back into the company

•Size of the organization

Case Study Case Study #1#1 – Key Person Coverage – Key Person Coverage

•76/M, $5,000,000•President / CEO•Income is $500,000, Net Worth $10,000,000

•‘Brains behind the company’ – started 30 yrs ago

•Oldest son is his successor and VP of the company

•Company valued at $9,000,000

•Retirement is not in his vocabulary per the detailed cover letter

Case Study Case Study #2#2 – Key Person Coverage – Key Person Coverage

•45/F, $10,000,000•CEO of start up internet company 3 yrs ago•Company lost $1.3 M in 10’, $2.5 M in 09’

•Income is $300,000

•‘Outside investors have provided $10,000,000 in income over the past 3 years•History of starting up two companies, both which she sold for over $20,000,000 each

Case Study Case Study #3#3 – Key Person Coverage – Key Person Coverage

•52/M, $5,000,000•Pastor of the ‘Church of Vegas Chapel of Sin’•Since he became pastor 20 years ago, church has grown from 300 parishioners to over 30,000

•Published and authored books and tapes

•Value of church estimated to be worth $30,000,000

•Net income in the church in 2010 of $4,000,000

•Net income reinvested back into the church

•Income is $200,000 - church provides home, car, etc

Income ReplacementIncome Replacement

Income ReplacementIncome Replacement•Income replacement typically uses the multiple of income approach to justify the death benefit

•Less than age 35…..… up to 30x income

•35 – 50……….……....up to 20x income

•51 – 60……………….up to 10x income

•60 – 70 ………………up to 5x income

•70 and over…………..up to 3x income

Income can be based on…Income can be based on…

•Earned Income

•Percentage of unearned income

•Bonuses

•Benefits… deferred compensation, healthcare, 401k

Other factors that may be considered for Other factors that may be considered for higher death benefitshigher death benefits

•Expected future increase in salary

•Single or married

•Number of children

•Product type… what about variable?

•$ for $ replacement

•Outstanding debt / mortgage

Case Clinic Case Clinic #1#1

•56/M, $1,000,000 Term•Unemployed, out of work for 6 months collecting unemployment

•25 year history employed as a systems analyst

•Prior income of $100,000 prior to being downsized

•$250,000 of permanent coverage in force

Case Clinic Case Clinic #2#2

•23/F, $1,500,000 Term•First year of Medical School at UNLV, undergraduate degree from BYU

•No coverage inforce

•Earns a total income of $15,000 as a waitress

•Annual premium is $1,250

Case Clinic Case Clinic #3#3

•45/M, $3,000,000 – UL •Stay at home Dad, father of 5 children

•$0 income

•Spouse is a pediatrician, earns $200,000 annually

•Spouse has $3,000,000 inforce

Purpose of Buy–Sell CoveragePurpose of Buy–Sell Coverage•What happens to the future of the company when a partner dies

•Some partnerships dissolve

•Lack of funding to purchase partners share

•Heirs do not have the skills to operate a business

•Provides for succession planning

Buy – Sell CoverageBuy – Sell Coverage•How many being insured and for what amount

•Consistent with the ownership of the company… 50/50, 70/30

•Coverage is equal to the business or stock ownership based on the book or fair market value of the business

•Financial documentation is the key, income and balance sheets over the past two years

•How was the value of the business determined

•Book Value

•Market Value

•Capitalization of Earnings Method

Business Evaluation Methods Business Evaluation Methods Viva Las VegasViva Las Vegas

What helps push you over the fence… What helps push you over the fence… Things to consider:Things to consider:

•Number of employees / size of company

•Number of years in the business

•Product

•Website

Case ClinicCase Clinic #1 #1

•Two brother seeking $500,000 each… ages 45/44•Sandwich, subs business, opened 6 months ago•Start up business, no profits… expect to earn a profit in year #2•Amounts determined base on their profit expectations and expansion•Previously were construction workers

Case ClinicCase Clinic #2#2

•Two partners… age 56 and 70% owner, other partner age 62 and 30% owner•2010 Revenue of $241 million

•Net income of $2,100,000

•Company established in 1925

What’s an acceptable face amount? Can you justify??

‘Team Value of $1.2 billion dollars’

Estate PlanningEstate Planning

Estate Tax Law Changes for 2011Estate Tax Law Changes for 2011•$5,000,000 individual exemption

•$10,000,000 joint exemption

•Maximum tax rate of 35%

•2013 reverts back to $1,000,000 individual & $2,000,000 joint exemption in 2013

Folks who avoided Estate Taxes in 2011Folks who avoided Estate Taxes in 2011

$600,000,000 in estate taxes

$500,000,000 in estate taxes $300,000,000 in estate taxes

Calculating Estate TaxesCalculating Estate Taxes

•Determine an acceptable interest growth rate •Younger the age, higher the growth rate

•Determine the years of growth based on percentage of life expectancy

•Any growth rate at ages 80 and up?

•Deducting the exemption amount

Underwriting Estate Planning CasesUnderwriting Estate Planning Cases

•Biggest area of concern for STOLI/IOLI/Fraud

•Older ages, table shave programs were abused

•Need for more personal balance sheets, tax returns

•Verification of bank statements, brokerage statements, real estate appraisals

•If not survivorship, why individual cases

•Evolution of smaller face amounts at older ages for ‘estate planning’

Case ClinicCase Clinic #1#1

•79/F, $250,000 – UL

•Standard Risk

•$100,00 in force

•Pension and SS income of $30,000

•Estate is valued at $800,000

•Premium is $15,000

Case ClinicCase Clinic #2#2

•73/F, $4,000,000 – UL

•No coverage inforce

•Joint net worth of $10,000,000

•Tax returns note an income of $175,000

•Premium is $89,000

•Table 2 risk

Case ClinicCase Clinic #3 #3

•51/F, $17,000,000

•Total line of $46,000,000 to be placed with several companies•Homemaker, previously a nurse

•Spouse is a doctor

•Joint net worth of $24,000,000•Mother in law looking to reduce her estate and pay a single premium on all policies… total of $3,500,000

•Preferred Risk

Any Questions?Any Questions?