Consider Disability Scenarios In Buy-Sell Planning

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When most agents and brokers hear the phrase buy-sell planning,” one of the first things that comes to mind is a life insurance sales opportunity.

However, focusing only the problems created by the death of a business owner may leave many other important issues unattended. Most notably, what will happen to the business if a partner or other person with a significant ownership share becomes disabled?

Considering disability scenarios in buy-sell planning is crucial. The buy-sell agreement should contain provisions that address situations created by the disability of a partner or major stockholder.

As the scenarios shown in the chart illustrate, a disability can create business problems that would not be encountered at the death or other termination of a part owner. A quick review indicates that each situation presents a unique problem.

Therefore, the first step in the planning process should be understanding the potential problems created by the disability of a partner or owner and drafting buy-sell agreement language that addresses such scenarios.

The next step is to provide a mechanism that will give the healthy owners access to the funds necessary to buy out the disabled owner. Disability Buy Out (DBO) coverage is designed specifically for this purpose. Benefits from a DBO contract may be paid in a lump sum or in a series of installment payments. DBO policies can be used in cross-purchase, entity-purchase or trusteed cross-purchase arrangements.

The psychology of the DBO sale can be somewhat counterintuitive when compared to an individual disability insurance sale.

It should be clear in reviewing the scenarios shown here, however, that those who benefit most from this type of planning may be the healthy owners. Which one of the partners will be disabled and which one(s) will remain healthy is anybodys guess.

Just as importantly, none of the owners wants to believe he or she is going to be the one who is sick or hurt. So when selling DBO coverage, focus your presentation on the benefits to those who will take the business forward, rather than the one who will no longer be involved.

Based on the modest sales of DBO products industry-wide, there may be a large and untapped market for DBO coverage. In fact, it could be argued that every buy-sell agreement insured with life insurance should be reviewed to determine if disability scenarios have been considered and funded as well.

Mark R. Ameigh, CLU, is manager of sales support and industry research at Berkshire Life Insurance Company of America, a Pittsfield, Mass., stock subsidiary of Guardian Life Insurance Company of America, New York, N.Y. His e-mail is mameigh@berkshirelife.com.


Reproduced from National Underwriter Edition, February 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.