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MTHEL 131 (111)
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Lecture 8

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Mathematics Electives
David Kohler

MTHEL131-week 8 Oct. 30, 2013 Buy-Sell Agreement Manage the risk of the unexpected death of a key employee/person • Insured: company • Life insured: key employee • Beneficiary: company Ex: Jane and Sally own a business together worth $1,000,000 Jane Sally 50% ownership 50% ownership Responsible for : Sales and marketing Responsible: production and finance Sally dies, Jane consoles Peter (Sally’s husband) • Production goes down • Customers turn to the competition • Peter sells Sally’s shares, Jane can’t afford $500,000 • Jane goes to bank to take loan, business is not in position of strength  doesn’t qualify • Peter takes over Sally’s 50% Prevention: Put it in place “Buy-Sell” Agreement • Legal document, holds true for more than two owners 1. Death – surviving partner must buy the shares from the estate • Jane takes out a policy for Sally’s life and names herself beneficiary, and vice versa • Each policy is worth $500,000, provides funds to buy shares • funded with life insurance (use of life insurance by business owners) 2. Disability – similar to death (see above) 3. Dispute – affects one or both partners’ desire to continue • Ex: different visions for the future of the business • One party decides to leave • Normally the first person to make a move wants sole ownership • Write a notice of the intent to purchase shares of other partner within 30 days • Other partner can agree or decide to try and buy shares and offers same price in that 30 days • No counter offers – only reason this wouldn’t go through if they don’t have the money • Fool proof • Ex: Toronto raptors, second party (receiving note) didn’t have the money to say no • No limits on original offer (low or high) MTHEL131-week 8 Oct. 30, 2013 Rule of 72 How long does it take my money to double? Percent of interest Number of years (investment Product of both (investment) period) values 3 24 72 4 18 72 5 14.4 72 6 12 72 7 10.3 72 8 9 72 9 8 72 10 7.2 72 Ex: 28 year old gets $50,000 from a will • Invested at 6 percent will double in 12 years o $100,000 by age 40 o $200,000 by age 52 o $400,000 by age 64 (retirement) Inflation • Annual Inflation is about 2% • Inflation has averaged 3% over the past 40 years • Inflation raises the price of cost of goods • Can use rule if 72 to work backwards Ex: retirement income is $40,000 at age 60 At age 84 $40,000 will seem like $20,000 (3x24) Cost of Distribution Chanel Actuaries design systems to distribute costs • Product sold, not bought • Must be sold face to face o Very minimal e-sales MTHEL131-week 8 Oct. 30, 2013 • Company build sales force Need to motivate customers (people don’t like contemplating their death)  need to train life insurance agents to know what to say (on commission) • Most companies had their own sales force (companyx agents would only sell companyx insurance policies) • Important for actuaries to build in cost of this expensive distribution network Ex: $300,000 policy with $1000 premium ($83/month) • Underwriting: o Ex: blood test cost ($100) o Commission ($800+) o Marketing, support, and incentives for agents ($800+) • Can take over a year for company just to break even Company Canada Sun life Manulife Great Mutual life London life Life Western life Agents 6
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