Disability Funded Buy-Sell

If you’re in a partnership, and one of you should become permanently disabled, the business has a problem. The disabled partner is no longer able to effectively contribute, and is likely prioritizing immediate cash (or wanting to divest themselves of their shares) over long term company growth. A disability funded buy sell agreement fixes this problem for both partners by providing the disabled partner cash for their shares, providing the other partner the full shares and control, and all without financial hardship to the business.

How it Works

A buy-sell agreement is entered into by the partners where both agree that if would becomes disabled that they will sell their shares to the company, and that the company will purchase those shares at that time. A disability insurance policy is placed on both partners. In the event of a disability, the policy triggers a payment sufficient to buy the shares from the disabled partner. Insurance funds are swapped for the shares and the result is that one partner now owns all the shares and the disabled partner has cash for their shares.

This protection strategy consists of two components; an agreement and a long term disability policy.

1

Buy-Sell Agreement

The first component is both partners enter into a buy-sell agreement triggered by one’s disability. In the event of a disability, the disabled partner agrees to sell their shares back to the company. The company agrees to purchase their shares at that time.
2

Funding

The second component is funding. There likely isn’t immediate cash in order to fund the share purchase so without a pre-planned source of funding the business will be forced to either liquidate substantial assets or seeking to qualify for substantial loans. The solution to this problem is a business disability insurance policy that pays in the event of a partner’s disability; this policy would provide the funds to purchase the shares of the disabled partner.

In the end, a partner becomes disabled, they agree to sell their shares to the company, the company agrees to purchase them, and the insurance company provides the funds to the company for the share purchase.

 

There are some complexities to be evaluated such as who owns the insurance policy and whether insurance proceeds are paid to the company or to the remaining partner. We determine and explain these complexities during our fact finding consultation.

Our advanced insurance specialists can provide you full details of how this can apply in your specific circumstances. Our first consultation starts with a detailed explanation of the strategy and information gathering. We’ll schedule a second consultation to provide and explain proposals. Lastly, we’ll step you through the application process. Start with an initial consultation.

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