Disability buy-sell coverage funds a business buy-sell agreement when an owner becomes disabled and can no longer continue in the business. In plain language, it is insurance designed to provide money so the remaining owners or the business can buy out the disabled owner’s interest.
Why this coverage exists
Many businesses plan for the death of an owner through life insurance, but disability can create a different problem. The owner may still be alive, but unable to contribute to the business while still holding an ownership stake. A disability buy-sell arrangement addresses that continuity risk.
The policy is typically coordinated with a buy-sell agreement that states:
- when disability triggers a buyout right or obligation
- how disability is defined
- how the business interest will be valued
- who will receive policy proceeds and who will purchase the interest
How the insurance works
The policy usually does not pay simply because the owner is sick. It pays when the contract’s disability definition, waiting period, and buyout provisions are met. The funds are then used to support the purchase of the disabled owner’s share.
This helps solve several practical problems:
- the disabled owner or family receives liquidity
- the remaining owners gain clearer control over the business
- the business avoids trying to fund a buyout entirely from operating cash
Practical example
Suppose two physicians own a practice together. One suffers a disabling condition and cannot return to work. A disability buy-sell policy can provide funds so the remaining owner or the practice can buy the disabled physician’s ownership interest under the agreed formula instead of trying to raise the money on short notice.
Related Terms
- Disability Insurance
- Disability Income Insurance
- Disability Benefit
- Family Income Policy
- Policyowner
- Premium