Posted by Amy Carbone on Jun 26, 2023 9:00:00 AM
Your company may have life insurance to help protect the organization against adverse financial consequences that may result from a partner’s death. However, you shouldn’t overlook and fail to plan for a partner’s disability. Disability buy-sell insurance is important because a partner disability could make continued ownership of a partnership in a business all but impossible.
Buy-Sell Agreement FAQs
What Is a Buy-Sell Agreement?
All multi-professional practices should have a buy-sell agreement that addresses both death and disability. The policy is primarily designed for small partnerships and professional corporations. The owner may be the business, a trust, or each owner may own a policy on the other owners. The existence of a formal Buy-Sell agreement is required.
For purposes of the Buy-Sell agreement, a disability Buy-Sell policy can provide not only the funding for a partner buy-out but the definition of total disability. This allows the insurance carrier, acting as an objective third party, to determine if a disability has occurred.
What Should Be in a Buy-Sell Agreement?
The disability buy-sell agreement takes a little more work to construct because of the variables associated with the following two questions:
- At what point during a disability will the buy-sell occur?
- How will the funding mechanism work (installments or lump sum)?
Once these two variables have been determined, the disability and life buy-sell language should be similar.
It is important to value the practice properly in order for the price to serve as the decedent’s value for federal estate tax valuation.
Buy-Sell Agreement Features
This is a summary only of key features, it does not replace the information contained in your policy. If a policy is issued, the terms of the policy will dictate what should happen in the event of a partner’s disability or death. In the event of a discrepancy, policy language will prevail.
Total disability. Helps protect in “Your Own Occupation.” The insured is totally disabled when he/she cannot perform the main duties of his/her occupation due to an injury or sickness and is not working in any other occupation. The insured must be under a doctor’s care.
- Conditionally renewable.
- Up to age 65.
- Guaranteed premiums.
- Premiums cannot change after the date of issue as long as the premiums are paid on time.
- Future Increase Option (FIO).
- Right to purchase additional insurance in the future as the value of the business increases.
- This feature is typically added as a rider, available at an additional cost to the policy.
- Elimination periods.
- 12, 18, or 24 months.
The insured must become totally disabled while this policy is in force. When such disability begins, the buy-sell agreement must be in effect. The insured must remain totally disabled for as long as the elimination period or, if later, until the date of the buy-sell. We must be given written proof after the end of the elimination period that a buy-sell has occurred because the insured has been totally disabled.
Other benefits:
- Waiver of premiums.
- Premium payments are waived after the insured has been disabled for 90 days.
- Premium payments will be refunded if paid during the 90-day waiting period.
How Do You Fund Your Buy-Sell Agreement?
A buy-sell plan can be funded with insurance, bank loan, or current profits. Most practices will choose to use insurance for the funding mechanism because of its low cost and flexibility.
For example, when considering funding the disability provision of a buy-sell agreement, a disability buy-sell policy will allow for lump sum funding. Without this policy, a bank loan would probably have to be obtained to buy out the disabled owner’s interest. The time it takes to apply for the loan plus the debt service may outweigh the premiums for the disability policy.
What Other Considerations Are There?
The next item to consider for the buy-sell agreement is whether it will be a cross-purchase or entity/ stock redemption. We will assume that the practice will be buying insurance to fund the agreement. In a cross-purchase arrangement, the individual owners will purchase policies on each other. The business owner being insured should not be the policy owner on their policy.
Disability Income Insurance and Buy-Sell Agreements
To find out how a buy-sell agreement can complement your disability income insurance policy, download the Disability Income Insurance Guide today.
About Treloar & Heisel
Treloar & Heisel, an EPIC Company, is a premier financial services provider to dental and medical professionals across the country. We assist thousands of clients from residency to practice and through retirement with a comprehensive suite of financial services, custom-tailored advice, and a strong national network focused on delivering the highest level of service.
Insurance products offered through Treloar & Heisel, LLC.
