Disability Buy-Out Insurance

If you became disabled and unable to continue working, would the other owners buy your interest? What price would they be interested in paying you and would you accept that price? How long can the business afford to operate without the disabled person's help? How long can the business continue paying the disabled person's salary?

A Disability Buy-Out Insurance plan will fund an agreement designed to provide the company owners with the money they need to purchase a disabled owner’s interest in the company at a mutually agreeable price and at the correct time.

A disability buy-out policy differs from a life insurance policy designed to fund a buy-out in the event one owner dies, although a life insurance policy may be constructed to provide for disability benefits. A disability buy-out insurance plan is specifically designed to pay an amount equal to the pre-arranged buy-out amount agreed to by the owners of the entity. Generally, the provisions provide for a lump-sum payment, thereby facilitating the buy-out; however, if the owners desire, the plan can permit the buy-out to occur through the use of periodic income payments.

A disabled owner or partner generally represents a dual liability to the company. First, the company must usually continue the disabled person’s income during the disability period and, secondly, the remaining owners must take up the slack caused by the absence of the disabled person or hire a temporary replacement. The disability buy-out insurance policy will have an "elimination period" of 12 to 24 months to limit the dual liability and to provide enough time to be quite sure the disabled person will not be able to return to the business.

By purchasing the policy before the disability strikes, the business can provide a mutually agreeable solution to a very difficult situation.

The advantages to a disabled owner include:

• assures a definite price and buyer under mutually agreeable conditions

• no need to worry about the ability of the business to meet the buy-out commitment

• avoids costly and time-consuming litigation trying to reach a fair price

• family members can direct their attention assisting the disabled person instead of worrying about protecting their share of the business

The advantages to the active business owners include:

• assures they can buy-out the disabled owners share at a price and a time agreed to by everyone concerned at minimal cost to the business

• active owners remain in control of the business

• creditors, customers and employees are assured of business continuity

• assures the disabled owner will not sell their interest to an outsider because of cash needs

The insurance premiums are not tax-deductible and any benefits paid to the company are free of income taxes. Funds paid to the disabled owner, however, are taxed as a capital transaction.

Any agreements and insurance policies within a business must be integrated with the overall plan and objectives of the business. Careful consideration must be given to the selection of the plan which is right for your business and to the method of funding your plan.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.