Funding your Business Buy-Sell Agreement with Disability Insurance

Having spent a lot of years working together to build up your business or your professional practice, you and your partners understand how important it is to protect the business in the event that one of you dies. A properly structured buy-sell agreement can make it easy for the surviving owners of the business to continue and for the surviving family members to be compensated properly for your share of the business. A buy-sell agreement can even provide the money to buy out a partner who wishes to retire.

But a disabling illness or injury can throw all of your plans out the window. Become disabled, and the business suffers, and your family suffers, and if you need to pay the buy-sell agreement premiums on the others partners in your business, you may not have the money to do so. A disability is a real threat, and you’re much more likely to be disabled than to die before you turn 65.

The way to minimize your risk is through disability income insurance. When you become disabled, a disability income policy will replace part of your earnings, in many cases for as long as the disability continues. With a buy-sell agreement, the proceeds from a disability policy can be used to continue your salary, or even to purchase your share of the business if you’re unable to return.

Most disability policies come with an elimination period – a length of time between when you become disabled and when the policy begins to pay benefits. The longer the elimination period, the less expensive the policy will be. But depending on the type of policy you’ve chosen, when benefits payments do begin, you may receive them all at once, or in regular installments, or even some combination of the two.

Coordinate the disability policy with your buy-sell agreement provisions

It’s critical to make sure that definitions used in your disability income insurance and in your buy-sell agreement are the same. What defines a disability has to match up properly in each contract. And the parameters of your buy-sell agreement, such as when a complete buyout is required, should complement the terms of your disability income insurance. Be sure to carefully select the waiting period, the method of benefits payment, and anything related to your repurchase of your ownership shares if you recover.

Different types of business buy-sell agreements

There are two types of buy-sell agreements: the entity purchase plan, and the cross-purchase agreement. With an entity-purchase plan, the company owns the disability policies, pays the premiums, and collects the benefits should one of the insured partners become disabled. With a cross-purchase plan, each co-owner agrees to the purchase of the business interest of any other co-owner who may become disabled. Each co-owner owns the disability policies, pays the premiums, and collects the benefits should one of the other insured partners become disabled.

Disability income funding can ensure you a fair price of a business.

Another big advantage of using disability insurance along with a buy-sell agreement is the provision that a co-owner can receive the full value of his or her business interest if he or she becomes disabled before death or retirement. With such coverage, a co-owner might be forced to sell his or her interest outside the company if the company did not have enough money to purchase the ownership share. The last thing you want to do is be forced to sell your part of the business for far less than it’s true worth.

Disability insurance secures your buy-sell agreement by setting forth the provisions under which an ownership share will be purchased, provides the money to guarantee a fair price, and even provides income protection while you’re recovering and your disability is not permanent.

What are the drawbacks of using disability insurance to fund buy-sell agreement?

• There are certain factors that might cause an insurance company to consider you uninsurable, including your age, your current health status, any high-risk hobbies in which you participate, or employment in dangerous occupations.
• Disability insurance only pays benefits when you’re ill or injured. There are no benefits from a disability policy if you die or retire from the business while still in good health.

What happens if you recover from your disability?

In the best of circumstances, after you’ve sold your share of the business, you could recover from your disability. At that point, you might find yourself without an income, and without the business you’ve spent so much of your life building. Be sure that your buy-sell agreement includes a provision that gives you the ability to buy back your share of the business if you recover. In addition to lowering your premiums, a longer waiting period will benefit you here as well, reducing the chance that you’ll have already sold your share of the business when your period of disability ends.

At BeamaLife, we’re as serious about protecting your business as you are. Call one of our specialists today at (877) 972-3262 or complete free disability quote request now.