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Disability Insurance - Buy & Sell Agreement

Buy & Sell Agreement Disability InsuranceA buy/sell agreement is a legally enforceable contract between two or more partners or shareholders. It clearly outlines exactly what will happen if a partner wishes to leave the business voluntarily, dies or becomes permanently disabled. You will find that many businesses do have buy/sell agreements for voluntary withdrawal and death, but not for permanent disability. It is important to add the disability provision to any buy/sell agreement. A buy/sell agreement should address:

  • How the business will be valued at any future point in time, and
  • The terms of ownership transfer and payment.

The disability component will add the following:

  • How long a total disability must last before a buy-out is triggered, and
  • How a total disability is to be defined or determined.

A buy/sell agreement is a document that all businesses with multiple owners should complete – just like all people should have a will. It minimizes the surprises and disagreements when the unexpected happens. The insurance company is not a party to the buy/sell agreement. Although the buy/sell agreement may be referenced by the disability buy/sell policy, it does not form part of the policy.

Although the buy/sell agreement will state the terms and conditions of a buy-out, it doesn’t do anything toward funding the buy-out. Where will the healthy principals get the money to buy out the disabled principal? Assuming they do not have sufficient personal or business funds, the choices really boil down to funding it with insurance or with a loan (assuming such financing is available). Arguably, a disability buy/sell insurance policy is the better funding method.

The disability insurance industry has created three business products, designed to protect three distinctly different business problems that a disability could create. They are: overhead expense disability insurance, key person disability insurance and disability buy/sell insurance.

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