Your company may have life insurance to help protect the organization against adverse financial consequences that may result from a partner’s death. However, you shouldn’t overlook, and fail to plan for, a partner’s disability. A disability could make continued ownership of a partnership in a business all but impossible.
Disability Buy-Sell insurance is designed for small business owners to provide funds for the purchase of the insured’s share of ownership in the business in the event he or she is totally disabled. Policies are primarily designed for small partnerships and professional corporations. The owner may be the business, a trust, or each owner may own a policy on the other owners. The existence of a formal Buy-Sell agreement is required.
The concept of disability as it relates to a partner’s active participation in a business is often far more difficult to define and describe than most other buy-sell triggering events. For purposes of the Buy-Sell agreement, a disability Buy-Sell policy can provide, not only the funding for a partner buy-out, but the definition of total disability. This allows the insurance carrier, acting as an objective third party, to determine if a disability has occurred.
Disability insurance policies have exclusions and limitations.