by Julie Ngo
Many business owners have created buy-sell agreements to protect themselves and their business in case of an untimely death. These agreements are often funded with life insurance to ensure that the cash to purchase the business is available when needed.
Permanent disability is another threat faced by business owners. Disability of an owner can create immediate issues as to who will operate and manage the business. Often, the risk of a permanent disability is not provided for in a buy-sell agreement in spite of the fact that the probability of a long-term disability prior to age 65 is greater than the probability of death.
To provide for this risk, business owners can amend existing buy-sell agreements or create separate agreements. Special disability insurance policies can be used to fund a disability buy-sell agreement. These policies can be set up to pay a lumps sum, a series of payments, or a combination of the two.
Key Elements to Consider
- Definition of disability: How disability is defined in the agreement is very important and should probably be tied to the definition in the disability insurance policy.
- Elimination period: The period of time between the first day of the disability and the trigger date, e.g., 12 months to 24 months are frequent options.
- Trigger date: This is the date at the end of the elimination period when the buyout begins and the insurance company begins paying on the policy.
- Successive disability: A disabled person may temporarily return to work but thereafter have a recurrence of the disability. In many plans, successive disability periods can be tied together to meet the elimination period.
- Funding period: The period over which the buyout payments are made. It can be an immediate lump sum or spread out over a period of months, or a combination of both. The funding period set in the policy should match the terms of the buy-sell agreement.
- Recover from disability: The recovery of a disabled person after the buyout has begun can raise several questions, among them: Does the funding stop? Can the person return to work with the same company? Lump sum settlement plans, in some cases, can remove some of the uncertainty.
- Buy-Sell agreement: The buy-sell agreement must be in force at the time of disability in order for payments to be made from the policy.
- Converting to individual coverage: Sometimes the disability plan will be convertible to individual coverage if the business has no further need for the coverage, the owner needs addtiional individual coverage, and he or she meets certain requirements.
- Involvement in the business: Many insurers require that the business owner be actively involved in the business.
Julie Ngo is a State Farm Insurance Agent located at 28410 Old Town Front Street in Temecula. She can be reached at (951) 695-2625.