If you co-own your business, your partnership agreement probably includes a buy-sell provision to settle matters if one owner either wants out of the business or dies. Now you can buy insurance to fund the buy-sell process in the event of a disability.
Disability buy-sell insurance provides cash to purchase the insured's share of the business in the event of his or her total disability. Don't confuse this with disability income insurance, which replaces your income if you become disabled. "Disability buy-sell protects the business value, rather than the individual income of the business owners," explains Paul M. Gribbons, vice president of disability income marketing and strategic planning for MassMutual Financial Group in Springfield, Massachusetts. "It allows the healthy owner to buy the disabled owner's share of the business without using business profits or personal funds. The benefit for disabled owners is, they get the value of their businesses and the satisfaction of knowing that the companies they worked so hard to build won't be financially hurt because of their disability."
The first step to obtaining disability buy-sell insurance is establishing the value of the business for the purpose of the buy-sell agreement. Insurance companies typically use standard formulas for this. Be sure your disability buy-sell coverage includes a provision that increases the amount payable as the value of your company increases.
Besides the amount of coverage, you need to address two other primary issues. One is the waiting period, which is the amount of time you must be disabled before eligibility kicks in. Grib-bons says the standard choices are 12, 18 and 24 months-obviously, the longer the waiting period, the lower the premium. The other issue is the benefit period: You can choose a lump-sum payment or payments over two, three or five years. Some providers offer a combination of the two.
Carriers may offer additional features, like transferability, which would allow you to transfer the contract after a change in the business situation. Some policies include a professional fee reimbursement benefit clause that provides for payment to attorneys or accountants, if necessary, at the time of the buy-sell agreement.
Disability buy-sell products are generally designed for partnerships and small, closely held corporations of two to five owners. Coupled with individual disability income protection, the coverage will allow your company to remain economically viable while protecting your personal income if you or your partners ever need to cope with a major long-term disability.
- MassMutual Financial Group, (800) 234-2865, ext. 73952, www.massmutual.com