The Benefits Of Using DI In A Buy-Sell Agreement
One of the major challenges faced by financial advisors with business owner clients is stressing the importance of adding disability insurance protection to their companys buy-sell agreement. While some clients may be hesitant to make such a purchase, its the role of todays financial professionals to ensure that disability insurance is mentioned when discussing methods for funding a buy-sell agreement.
Even though many business owners may realize the need to plan for the possible death of a partner, they may not recognize the effect that a partners disability could have on other business owners.
Since the awareness for DI buyout protection is still in its infancy, many producers may not realize that the benefits of the solution clearly can be good for both the client and the producer. In fact, your business owner clients might benefit both individually and in their businesses from including DI buyout protection (along with life insurance) in funding their buy-sell agreement.
In essence, there are 3 points about disability insurance that you should keep in mind when funding a disability buy-sell agreement. These may be helpful as you prospect in the business owner market:
1. The market opportunity is substantial. According to a 2001 report from LIMRA, the small business market has grown substantially over the last few years. Likewise, in its 2003 U.S. Individual Disability Income Insurance Survey, LIMRA found that business policies continue to be a growing niche market in the predominantly personal DI market.
At the same time, many businesses today still lack a succession plan. According to a 2000 American Business Family Survey, 75% of small businesses dont have a succession plan. While its clear that no small business plans to fail, they do fail to plan and the effects on the owners can be significant.
2. Both disability and death are risks that need to be protected against. Something that both advisors and clients may not realize is that the occurrence of disability can be much more likely than death during a business owners working years. In fact, 1 in 7 working Americans will be disabled for 5 years or more before age 65 (Commissioners Disability Table, Senate Finance Committee). Studies show that a 42-year-old business owner is three and a half times more likely to suffer a disability than death before the age of 65.
3. Impact on the business. Arguably, disability has a much more devastating (financial and emotional) impact on a business than the death of a business partner.
Certainly, there are other reasons to consider as well. But, for these reasons alone, it could be argued that advisors have a professional obligation when developing a buy-sell agreement for clients to make sure the disability insurance side of the buy-sell is taken care of and appropriately funded.
Businesses Fail to Plan, Producers Ignore DI. According to the U.S. Small Business Administration, 85% of family businesses dont survive to the third generation. And while life insurance needs to play a key role in the development of the buy-sell agreement, it is equally important that this agreement be funded with disability buyout insurance as well. Despite an obvious need for disability protection, a significant number of producers dont even consider it when structuring a buy-sell agreement.