BUY-SELL DISABILITY

What are your odds of becoming disabled for 12 months or longer?

Let’s say you are one of two partners and that you and your partner are 37 years old. Given these facts, what would you say are the odds that one or the other of you would be unable to work because of illness or injury for 12 months before you both retire? Would you say one in a hundred? Maybe one in ten? The chance is really one in four!

Business owners rely on each other to keep the business running smoothly. What would happen to the business if one owner couldn’t return to work? How long could the business pay the disabled owner? At what point would the remaining owner(s) want to buy out the disabled owner? Where would the money come from?

  • Current Earnings – Can the business afford it with reduced earnings and increased expense?
  • Create a Sinking Fund – Is there enough time to accumulate the funds?
  • Obtain Loans – Who would loan you money if revenues are down and expenses are up?
  • Sell Assets – Isn’t this liquidating the very business you are trying to save?

Disability Buy-Sell insurance allows the owners to pass the determination of complete disability and the buy-out funding to a third party. It allows them to concentrate on keeping the business going without the services of the disabled owner. The advantages of using disability buy-out insurance to fund the buy-sell agreement are clear: It assures adequate funding for the disabled owner’s interest. It avoids a hit to working capital and the credit position of the business. It reduces the pressure to liquidate business assets to fund the buy-sell obligation. Perhaps most important, it can cover a funding need that arises just days after the creation of the buy-sell agreement.

RESOURCES

For a discussion of disability income basics:
http://www.pueblo.gsa.gov/cic_text/employ/lt-disability/insurance.htm

The benefits of a policy may be income tax free [IRC §104(a)(3)]:
http://www.irs.gov/faqs/faq-kw43.html

Disability income is essential for professionals:
http://pfp.aicpa.org/Resources/
Insurance+and+Risk+Management/Disability+Income+Insurance/

For additional information about the uses of disability income:
http://www.life-line.org/GuidetoDI-2005.pdf