Funding Your Buy-sell Agreement With Disability Insurance

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What is disability insurance?

Disability insurance is an insurance policy that pays a benefit in the event of a long-term illness or injury. The policy contains specific definitions of what constitutes a disability and the time frame (waiting period) between the disabling event and the first benefit payment.

How can disability affect your business?

Higher likelihood of owner disability than death for given period
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The scary fact is, the likelihood of you or one of your co-owners becoming sick or injured for 12 months or longer before age 65 is much higher than the likelihood of any one of you dying. This means a higher likelihood of the buy-sell agreement being triggered by disability than death for any given year.

The chances of at least one disability lasting 12 months or longer in a group of two, three, or four owners with an average age between 27 and 52 are shown in the following table:

Chance of Disability before Age 65

Number of Owners

Average Age23

4

2726.3%36.7%

45.7%

3225.6%35.8%

44.7%

3724.5%34.5%

43.1%

4223.0%32.4%

40.7%

4720.7%29.4%

37.1%

5217.4%24.9%

31.7%

Disabled owner still needs income and the business may be unable to continue paying salary

If you become sick or hurt, you would still need income to cover your living expenses. Health insurance may cover all or most of your medical needs, but it can't do much for your mortgage, your car payment, shoes for your kids, or your grocery bill. The business may not be able to pay you a salary for not working without the payments being considered dividends. Generally, companies are allowed to pay dividends only under certain circumstances, and the money must come from surplus funds.

Tip:A disability salary continuation agreement established before an event of disability would allow the company to continue paying salary to a disabled owner for a specific period of time. The agreement can be structured to apply to certain individuals or groups, without covering all employees.

Co-owners may be unhappy paying nonproductive owner

Your co-owners will probably be reluctant to continue paying you if you cannot work. Even if the company is able to do it, continuing to pay out your salary will probably cause a cash drain on the company as well as extra work for the remaining co-owners who are trying to fill your duties while you are out of work.

Business may be directly affected by your absence

Your business may be adversely affected by your sudden absence due to disability. Depending upon your role within the business, your absence due to disability could result in a slowdown or even a loss of sales; replacement costs incurred in attempting to find and train a replacement; possible slowdowns in production; and the possible loss of goodwill with customers and trading partners.

How can you use disability insurance with your buy-sell agreement?

by: Project

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