Buy-Sell Disability Insurance
Starting a business is always risky, but business partners can increase the odds of success by anticipating problems and ironing out a plan ahead of time. For example, what will the business partners do if one of them can no longer participate in the business because of a disability? A disability buy-sell agreement funded by buy-sell disability insurance provides a practical solution for this common problem. Business partners should trust each other. Otherwise, they’re probably better off not starting a business together. However, the fact that they trust each other does not guarantee that they’ll never face problems or disagreements. Situations change, and planning ahead of time for possible issues just makes sense.
For example, maybe you and your business partner plan to run the business together for around thirty years, at which time you’ll both be ready for retirement and looking to sell.
You’re on the same page, and everything is going great – until you’re diagnosed with cancer. You’re pretty sure you can beat it, but between the illness and the treatment, you don’t have the energy or time to run a business. Treatment is also expensive. You need to sell your stake in the business, and you need to do it now.
Your partner wants to buy you out, but he doesn’t have the cash to do so, and he doesn’t want to have to sell his property or investments to raise funds. He’s not comfortable taking out a loan, either. You could look for someone else to buy your stake in the business, but you’ll have to find someone quickly, and your partner might not like the person you pick. Your partner could sell his stake, too, but he’s put his heart into the company, and he isn’t ready to say goodbye to it yet. You explore every option, but there just aren’t any good solutions. This is the type of situation that a disability buy-sell agreement can help avoid.
How Disability Buy-Sell Agreements Work
- A buy-sell agreement is a legal contract stating how business partners will proceed if one partner needs to exit the business. For example, in a cross-purchase agreement, the remaining owners agree to purchase the other partner’s stake. In an entity purchase agreement, the company itself purchases the stake.
- A buy-sell agreement can also outline how a fair price for the partner’s stake will be determined. By working out all of these details ahead of time, business partners can avoid disputes later.
- Buy-sell agreements aren’t just for disability. They can also cover other situations, such as death, that could prematurely end a business relationship. However, because disability is common, it’s important to make sure buy-sell agreements cover this possibility.
How Disability Buy-Out Insurance Works
- A buy-sell agreement is not an insurance policy. It’s a business contract in which a company or partner agrees to buy a partner’s stake in the company under certain circumstances. However, such an agreement becomes meaningless if the person who’s supposed to buy out the partner doesn’t have the funds to do so. That’s why insurance is important.
- Other funding options include savings and loans. However, not everyone has sufficient savings, so that may not be possible. Securing a loan might not be possible, either, and even if it is, the interest may make this a costly option. For many business partners, insurance is the most practical and reliable option.
- Buy-sell life insurance is a type of life insurance that can fund a buy-sell agreement that’s triggered by the death of a business partner. Buy-sell disability insurance is a type of disability insurance that can fund a buy-sell agreement that’s triggered when a business partner experiences a disability and has to exit the business.
- It’s important to read your disability buy-sell insurance policy carefully and to make sure the terms meet your needs. One issue to consider is when the insurance will provide a payout – what qualifies as a disability under the terms of the policy? Another key issue to consider is how much the policy will pay. You want to make sure your benefit is large enough to cover the buyout agreement.
Business Partners Face High Disability Odds
- When people are starting a business, disability may be the farthest thing from their mind. They may be young and healthy, so how likely is it that they’ll experience a disability?
- Actually, it’s pretty likely.
- The Social Security Administration says that more than one in four of today’s 20-year-olds will experience disability before reaching age 67. Let that sink in. There’s a one in four chance that a person will become disabled before reaching retirement age. It’s a real possibility that people should plan for.
- And that’s just for one person. If you have two business partners, the odds that either of them will experience a disability at some point is even higher – and some businesses have three, four or more partners. The more business partners you have, the more likely it is that one of them will experience disability.
Comparing Individual Disability Insurance to Mortgage Disability Insurance
Business partners need to be prepared for the risk of disability.
- Do you know the type of buy-sell agreement you want? You have multiple buy-sell agreement options to consider.
- Do you have a solid buy-sell agreement? This is a legally binding contract, so it needs to be solid. Have a lawyer draft your agreement.
- Do you have the money to fund your buy-sell agreement? Insurance is common funding method.
- If you’re using insurance to fund your agreement, do you have enough coverage? You need coverage for all partners, and the disability buy-sell benefit needs to be sufficient.
- Are you updating your agreement and coverage as needed? Changes in your business may require a new arrangement or insurance policy.
Protecting Small Businesses with Disability Insurance
A buy-sell disability insurance policy can help business partners plan for the impact of an unexpected disability. However, it’s not the only type of disability insurance product that small business owners may need.
- For the business: A disability can threaten a small business, but there are disability insurance products designed to help. If a small business owner experiences a disability, business overhead expense insurance can cover certain overhead costs, and bank loan disability insurance can cover bank loan payments. If a key employee experiences a disability, key person disability insurance can provide a payment to the business to help with the resulting costs.
- For the individual: A disability can also threaten a person’s personal finances. Individual disability insurance replaces a portion of the policyholder’s income if a disability prevents the policyholder from working. Multi-life disability insurance discounts and guaranteed standard issue disability insurance may be available for groups.
Are You a Business Owner?
Don’t let a disability threaten the business you’ve worked so hard to build. If you’re a small business owner, talk to an insurance agent about your disability insurance needs. Find an agent.
Are You an Insurance Agent?
The U.S. Small Business Administration says that there are 31.7 million small businesses in the U.S. Many of these businesses need disability insurance products, but small business owners may not always be aware of this need. If you’re an insurance agent, talk to the business owners you serve and make sure they understand the risks and coverage options. Get a quote.
