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MTHEL 131 (105)
David Kohler (100)
Lecture 7

MTHEL 131 Class Note Lecture 7

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University of Waterloo
Mathematics Electives
David Kohler

[Nov. 2, lecture 7] 1 BusinessApplication (Requirement) for Life Insurance - Jane and Jill start a company - Jane is good at production and manufacturing side, Jill is good at sale and finance - They corporate this company and 5 years later, its value became $1,000,000 - Each owns 50% - Once day, Jill passed away -After the funeral, Jill’s husband Bob met Jane - Bob wants Jane to buy him out for $500,000 (the value of Jill’s share) - Jane does not know where to raise the fund to buy Bob out, and she goes to see the banker to borrow a load -Ability for banker to grant a loan is to see the large degree of your ability to pay that loan back over time: big component → the cash flow - Since Jill passes away, and she has been taking care of the sale and marketing, the company has decrease in sale -And Jane promise to work through that - Banker asks Jane to come back when the sales pick up - Jane goes back and tells Bob, Bob asked to move into Jill’s office and takes Jill’s salary - But Jane does not like Bob - What will Jane do? - Before all that happened, Jane and Jill should go to find a financial planner who understands challengers of small business corporation and could have provided with potential solution 1. Buy-SellAgreement Abinding agreement between co-owners of a business that governs what happens if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business  D: Death 1. After the death, how to handle the share 2. Making sure to put in place the funding Jane (policy holder) $500,000 Jill (life insured) Jill’s family $500,000 Jill (policy holder) Jane (life insured) Jane’s family “Chris-Cross” Arrangement 3. If the company value goes up, they can evaluate the company value annually, and [Nov. 2, lecture 7] 2 purchase a PUApolicy to add up the coverage  D: Disability  Each partner would take out a disability insurance policy on the life of the other; and if the person become disable in the long term sense, then the money would be used to buy shares from the disable person, so that the health partner has all the shares, and the disable partner has the buy out  D: Disagreement (the “shotgun” clause) - Outcome: the company is owner entirely by one of the two partners - Day 1: Jane comes in Jill’s office and presents her with a formal written offer to buy her shares by $500,000 - Day 30: will all be resulted - Jill has 2 choices:  Accept, and in the end of 30 days, she will receive a check of $500,000  Instead, Jill is going to buy Jane out for $500,000; but Jane can do nothing - Once started in motion, it cannot be stopped, and there will be one owner in the end of 30 days -ABuy-SellAgreement without a funding is useless 2. Keeper Insurance - Richard Martin put a keeper insurance policy on the life of William Gibbons -After a most valuable employee dies, the company would be financial affected, and it would need the funds afford cash flow, new employee training, etc. Distribution Channel - Each of insurance company would hire and develop its own sales force - The captive sales force can only sell products of their company -As a sales person of Canada Life, the arrangement was that you could sell any Canada Life’s products, you could not sell the products of any other companies - Same thing: Mutual Life, agent only can sell Mutual Life’s products; Manulife only Manulife; Sun Life only Sun Life - The insurer promises that they would only distribute their products through their sales force -As a consume, if you want to purchase a Sun Life product, you only could purchase it through a Sun Life agent [Nov. 2, lecture 7] 3 - In late 1980, early 1990, Canada Life wanted to do something different, they were under the gun to get more sales Sales people/Agents across the country Canada Life 1,000 Mutual Life 1,200 Sun Life 800 Manulife 1,000 London Life 1,100 Independent Brokers 15,000 - Independent broker: sold insurance products won’t be affiliated with any company and they did business with other smaller insurers - Canada Life started to offers to sale the products through the 15,000 other distribution point from coast to coast -  Those 1000 agents were angry, and Canada Life’s Sales sale was going down - After a year, Canada Life pulled out from the situation, allowed its agents to sell other companies’ products if you feel other companies might have a   Time better product than us (except Mutual Life, Sun Life, Manulife and London Life who have their own sales force) - This is the end of Canada Life sales force - Now there is no such thing as Canada Life life insurance agent anymore, and no Manulife agent; instead there are just more brokers - Now, only Mutual Life [(Clarica) bought by Sun Life] and London Life have their exclusive sales force - Several years later, when Sun Life realized that they abandoned their sales force, they bought Clarica (Clarica has 3,000 agents), because they wanted to go back the day that they had their own dedicated sales force - Today, the 2 companies with dedicated insurance sales force are Sun Life (who owns Clarica) and London Life; they are the only 2 insurers who continue to have their own exclusive sales force - It is expensive to maintain its own sales force - The traditional approach of life insurance would be agents sitting in front of the prospect; it [Nov. 2, lecture 7] 4 is approximately 95%-96% of all sales; because it involves counseling, discussion - In general it is expensive to sell a life insurance policy even through other sales force Commission Ex. Premium: $1,000/year, or $83/month; Coverage: $500,000; Term Insurance - How much would the agent earn from the sale? - The sale commission of the sale person would earn 1×Annual Premium st - When the 1 month the product was sold, the insurer has received $83 premium, and they pay the agent $1,000 commission - Plus, there are other expensive in this policy - The average cost to do underwriting is $150 - Marketing associated for sales people, the marketing cost is about 90% of the commission pay → extra $900 indirect marketing cost - Total cost $2050 to issue a policy - The breakeven point for an insurer on the sale of a life insurance policy is 6 or 7 years - If the policy only stays enforce for
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