Protecting Partners and Saving Business Relationships: Broker Newsletter

The Role of Disability in the Buy-Sell Agreement

In today’s article, we want to spend a few minutes discussing an often overlooked plan for your business clients … a Disability Buy-Out Policy.  We will not apologize for the plethora of information, its dry nature, and the newsletter’s length; we know of no other way to discuss an involved product such as this!

Similar in nature to life insurance sold for buy-sell agreements, this plan exists to cover a need.  Instead of death, the trigger is a disability.  These plans have long elimination periods, 365 days, 540 days, or 730 days depending on the carrier. Unlike triggering a life insurance benefit, clients may be able to return to work so you don’t want the benefit started too soon. Besides, what partner or shareholder would not want to return to their business?

Valuation

We won’t get into valuation methodologies (which are important to help determine the partner/shareholder value) as they are too intricate.  However, the amount of coverage allowed for each partner/shareholder is predicated on his or her ownership percentage.

Who and how many to cover?

As a rule, you do not have insurers willing to cover more than 4 or 5 partners as it would prove too costly.  In addition, the principals can more easily fill in if another partner/shareholder becomes disabled.  According to Principal Financial, “A buy-sell agreement is not required in order to purchase DBO insurance, but one must be in place at the time of a disability claim.  In the state of New York, the buy-sell agreement must be in place before purchasing DBO insurance”.

How is it purchased?

There are two methods of paying for the coverage: entity purchase and cross purchase.  Once again, just like life insurance, you select the one that best fits the needs of the client.  Too many policies are cumbersome (and expensive), so often with 3 or more partners/shareholders, the entity purchase will make the most sense.

How does the policy pay out?

The payout on these policies will rely on the total amount at risk.  With multi-million dollar agreements, the benefit is normally paid as a partial lump-sum followed by monthly installments.  They can also pay out in monthly installments only with no lump sum.  Lastly, smaller amounts ($1 Million and less) can be paid in a lump-sum, which is the cleanest and easiest.  No matter, a buy-sell agreement will be required at time of claim to determine the valuation method used, the benefit amount (percent of business), and the validity of the claim.

How can we help?

If you need assistance in forming a plan for your business clients, we are here to help.  We have built a successful track record in developing buy-sell agreements, that when combined with new individual disability policies, have generated substantial premium discounts for the client.

Please reach out to us so we can make your process easier!

800.358.8844

info@insurance-specialties.com

http://www.insurance-specialties.com

http://www.facebook.com/insurancespecialtiesinc

https://twitter.com/isi_psi

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Business Owners and Disability…Keeping the Business Running: Broker Newsletter

Do you have business clients that:

  • Own a business?
  •  Are partners with 1 to 5 others?
  • Are members of a small corporation with less than 10 principals?
Business overhead is there to protect the business in the event the owner, partner, or working shareholder becomes disabled.  As agents and brokers, it is our responsibility to make certain we provide our business clients with Business Overhead Expense Insurance.

BOE will pay the expenses of the business in the event of a disability and is a 100% tax deductible expense to the business!

Here are a few covered expenses:

  • Rent
  • Utilities
  • Employee Salaries
  • Telephone
  • Loan Payments
  • Professional Services (Legal/Accounting)
  • Professional Replacement
  • Advertising

For a few pennies on the dollar, your business client can protect all that he/she has built. In the event he/she is unable to return to work, the business can be sold as a going concern.

At Insurance Specialties Inc., we are here to help you design and implement the most comprehensive and competitive plan based on the carrier strength, occupation, health, and goal of your client.

It is our advanced knowledge and understanding that drives us forward.  Let us share our expertise with you! 

800.358.8844

info@insurance-specialties.com

http://www.insurance-specialties.com

http://www.facebook.com/insurancespecialtiesinc

https://twitter.com/isi_psi