If you are a financial professional who works with clients that co-own a business, it’s crucial to speak with them about a buy-sell agreement and how disability insurance offers an easy way to fund a potential buyout. Many business owners don’t realize that their current lack of disability insurance might leave them with a hefty bill if their co-owner is incapacitated.
The money used to complete an unexpected buyout has the potential to destabilize an organization permanently, so financial professionals should encourage owners to proactively purchase disability insurance that can keep their business running smoothly should something unforeseen occur.
The basics of a buy-sell
Buy-sell agreements are crucial for co-owned businesses that want to make a smooth transition after one owner dies or is incapacitated, Forbes explained. Without a buy-sell agreement, the loss of a co-owner can result in ownership disputes that tear an organization apart. A buy-sell creates an organized plan for buying out an owner should something happen, and creates terms for buyout conditions ahead of time. Creating this agreement before a problem occurs allows the owners decide on the terms without the strain of death or disability weighing over the proceedings.
While a buy-sell agreement provides a process for how to handle a bad situation, it doesn’t provide the funding necessary to complete the plan. Disability insurance fills this monetary gap.
Speaking with clients about disability insurance
Financial professionals can speak with clients about the relationship between disability insurance and buy-sell agreements whether or not a client already has an agreement in place or is in the process of creating one. In either case, disability insurance removes monetary barriers concerning the execution of a buy-sell agreement, and offers valuable peace of mind to clients who wonder if enacting a buy-sell could negatively affect their company’s bottom line.
To ensure that the disability policy supports the buy-sell agreement, providers need to ensure the definition of disability is identical in each document, according to the American Institute of CPAs. If that is the case, the buy-sell agreement will go into effect alongside the disability policy, and the benefits will be directed into the agreement. Financial professionals should emphasize that a disability policy is only useful in cases of illness or injury. To achieve a similar effect if one of the owners dies, the business will need to investigate life insurance options.
