The Benefits Of Using DI In A Buy-Sell Agreement

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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.

Why arent more people taking advantage of it? There are a few basic reasons why producers might ignore the DI buy-out sale:

“Its too complicated.” Agents may think that the DI buy-out product is much more complex and harder to underwrite than it actually is. In fact, DI buy-sell coverage is designed to fit a specific business need (which allows for longer elimination periods), and by virtue of that, is simpler and easier to underwrite from a medical perspective than personal DI products.

“Its too expensive.” Agents have a tendency to think that the DI buy-out product is much more expensive than it is. Actually, the DI premium is only a fraction of the cost of the life premium.

Making The DI Buy-Out Sale. When approaching prospects about disability insurance to fund their buy-sell agreement, there are some key steps you need to keep in mind:

1. Illustrate the need. Clearly, there are a large number of small businesses without succession plans. As a first step to identifying a need for DI protection, its critical to make surefirst and foremostthat the business partners do, in fact, have a buy-sell agreement in writing. If a clients buy-sell agreement does not include DI, you should illustrate the benefits of the coverage to the client and consider revising or amending the agreement.

2. Illustrate the difference between personal and business protection. Important to remember is that, even if the business owner has reached his or her limits on personal individual DI, the need for DI buy-sell coverage may still exist. Agents should remind their clients not to overlook the need for business DI protection. Even if the client has individual DI coverage, DI buyout protection still is needed to cover the business.

3. Obtain the clients full tax returns. Consider their implications and effect on underwriting first before promising the client a specific benefit amount. It is better to underpromise and overdeliver when it comes to evaluating the financials of a DI buy-out.

4. Present options to the client. Once the client understands the financial need in the event a partner becomes disabled, you can then address the important question. That is, would the client prefer that the money come out of his or her pocket, or would the client like the insurance company to provide the funding mechanism? Presented with that choice, clients tend to opt for the disability insurance solution.

In short, its key to make the DI buy-out product (along with life insurance) part of the protection package for the buy-sell agreement.

Providing True Value. By considering all of the clients potential needs in the preparation of a buy-sell agreement, you truly are providing a value to your clients. Of course, if you feel you lack the expertise or experience in disability insurance, one option to consider is working with a DI specialist.

While some clients may be hesitant to consider their disability needs, by being prepared, you can point out a number of issues and factors that your client may have never thought of before. In the end, you are not just raising awareness and being a client-focused advisor, youre helping to ensure that none of the partners will ever have to choose between his or her personal welfare and the welfare of the business if a partner becomes sick, injured or unable to work.

, CLU, ChFC, LUTCF, is vice president, life and disability marketing for MetLife, Bridgewater, N.J. He can be reached at bdehais@metlife.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 2, 2004. Copyright 2004 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.