Disability Buy-Out: A Powerful Door Opener
Do you want to increase your share of the business market? How would you like to uncover solid cross-selling opportunities while positioning yourself as a valuable problem-solver? 3 words: Disability… Buy… Out
The Significance of Disability Buy-Out
Some business owners have a buy-sell agreement in place. It is a widespread practice where the partners or the business owns life insurance on the partner’s lives. If one partner dies, the death clause in the agreement triggers the payment of life insurance proceeds to the deceased partner’s family or estate for their share of the business. The remaining partners absorb the deceased partner’s share of the business.
But what if the partner does not die and instead suffers a permanent injury or illness?
Most people do not know that buy-sell agreements typically carry two clauses: a “death clause” as described above and a “disability clause.” In many cases, advisors sell life insurance to fund the buy-sell agreement’s death clause, but they neglect to fund the disability clause. This is a missed opportunity as the average person is six to seven times more likely to become disabled than they are to die during their normal working years.
When a partner becomes disabled and unable to work for an extended period, the other partners and the business face the same consequences as if the partner were to have died. A disabled partner still owns a share of the business and is entitled to its profits but cannot work to help generate those profits, placing additional stress on the business.
What They Do Not Know Can Hurt Them
Check your clients’ buy-sell agreements and if it does include a disability clause, it may contain language that requires the other partners to buy out the disabled partner after a period. If that is the case, where do they get the money to do so?
One simple solution is to fund the disability clause with a disability buy-out policy for each partner. A disability buy-out policy will compensate the disabled partner in one of three ways:
- A lump sum payable after one year of disability
- An initial down payment with annual installment payments over several years
- Scheduled payments for six or seven years
You Know Who to Target
Your top prospects for a disability buy-out are in your book of business—business owner clients with one or more partners. You may have already sold them life insurance to fund one of the clauses. HAs the other been taken care of?
Straightforward Approach
Ask just two questions to start the conversation:
- Do you have a buy-sell agreement in place?
- What have you done about the disability clause in the agreement?
This helps uncover many new opportunities as we are sure you will find many multi-owner businesses do have a buy-sell agreement, mostly unfunded for disability. Many are outdated and have shortfalls for both life and disability, and some are even incorrectly structured.
The primary reason for asking the first question is so you can ask the second question. Nine out of ten businesses have never addressed the possibility of one partner becoming disabled and unable to work. When you help them understand what the disability clause says and that the odds of a disability are far greater than death in their working years, it creates the opportunity for you to help them resolve this key area as a problem solver. This will help differentiate you by identifying problems they did not know they had and offering a solution and will also open the door to additional opportunities and referrals.
Working with First American Insurance Underwriters, we will help you find a disability buy-out solution tailored for your clients’ needs and circumstances. Reach out to us and we will find the best solution for you and your client.
— By Ed Stone, LTC, DI & Annuity Specialist