Buy/Sell Disability Income Insurance Planning: A Key to Business Continuity

By Financial Solutions Group, Inc.

In the fast-paced world of business ownership, proactive planning is not just a smart strategy—it’s essential. While many entrepreneurs and business partners understand the importance of having a buy/sell agreement in place in case of death, far fewer account for what may be a more statistically likely event: disability. At Financial Solutions Group, Inc., we believe that addressing this gap is not only wise but critical to business continuity. That’s why Buy/Sell Disability Income Insurance should be at the forefront of every financial advisor’s toolkit when working with business clients.

The Silent Threat: What Happens When a Business Owner Becomes Disabled?

Imagine a thriving business built on the talents and expertise of two or three owners. Now imagine that one of those owners suffers a debilitating injury or illness. They’re no longer able to work, but they still have ownership rights. They may still be drawing income. They may even disagree with how the remaining partners want to move forward. What happens next?

Too often, businesses find themselves in turmoil. Without a plan in place for this scenario, partners may be forced into a difficult financial position. The disabled owner may wish—or be legally entitled—to remain on payroll. The business may be expected to buy out their share, even if it lacks the cash reserves to do so. In the worst cases, the business dissolves entirely, or is sold at a discount to settle obligations.

Disability is more common than most people think. According to the Council for Disability Awareness, one in four of today’s 20-year-olds will experience a disability before retirement. That statistic should serve as a wake-up call for business owners. When it comes to business continuity, ignoring the possibility of disability isn’t an option—it’s a risk too great to take.

Why Traditional Buy/Sell Agreements Aren’t Enough

Most buy/sell agreements address death. Life insurance is typically used to fund the buyout of a deceased partner’s interest. But disability is a more complex, gray-area event. A person could be disabled for months, years, or permanently. They might recover, or they might not. How does a business respond?

Here are just a few of the potential problems:

• Cash Flow Strain: The business may have to keep paying a non-contributing partner.

• Operational Disruption: A disabled owner’s duties go unfulfilled, affecting productivity.

• Legal and Ownership Tension: Without clear provisions, disputes may arise between partners or even with the disabled partner’s family.

• Reduced Valuation: Uncertainty around ownership and leadership can reduce a business’s market value.

This is why every comprehensive buy/sell agreement should include clearly defined provisions—and funding mechanisms—for the event of disability. And that’s where Buy/Sell Disability Income Insurance comes in.

What Is Buy/Sell Disability Income Insurance?

Buy/Sell Disability Income Insurance is a specialized insurance policy designed to fund the purchase of a disabled business owner’s share in the business. It ensures that the company, or the remaining owners, have the financial ability to uphold the terms of the buy/sell agreement without putting the company at financial risk.

This type of coverage is not designed to replace a disabled individual’s personal income—that’s what traditional long-term disability insurance is for. Instead, Buy/Sell DI provides a lump sum or structured payments to facilitate a buyout when an owner is no longer able to fulfill their role.

The Benefits at a Glance

• Guarantees liquidity to buy out a disabled partner

• Protects the business from financial strain

• Ensures a smoother transition and continuity of leadership

• Prevents disputes and legal challenges

• Maintains company value and confidence among stakeholders

Key Components of a Buy/Sell Disability Plan

Creating an effective Buy/Sell Disability plan involves more than just purchasing a policy. It requires careful planning, collaboration with legal and tax advisors, and ongoing review.

1. Definition of Disability

This is the foundation of the plan. The agreement must clearly define what constitutes a “disability.” Common definitions include:

• The inability to perform the substantial duties of one’s occupation

• The inability to work in any gainful occupation for which one is reasonably qualified by education, training, or experience

• Total and permanent disability, as determined by a licensed physician

Clarity here prevents future disagreements.

2. Elimination Period (Waiting Period)

This is the amount of time the owner must be disabled before the buyout process begins. Most policies use a 12 to 24-month elimination period to avoid triggering the buyout in short-term disability situations.

3. Valuation of the Business

The agreement should spell out how the business will be valued at the time of disability. Common methods include:

• Book value

• Multiple of earnings or revenue

• Agreed-upon fixed value (updated annually)

• Third-party formal valuation

A pre-agreed valuation method ensures a fair and efficient buyout.

4. Funding Mechanism

Determine how the buyout will be financed, typically through a disability buy/sell insurance policy. The policy pays out in the event of long-term disability, providing the funds to purchase the disabled owner’s shares.

5. Payout Structure

The agreement should specify how the buyout will be funded—either as a lump sum or as structured payments over time. The insurance policy should be designed to match this structure.

How Buy/Sell Disability Policies Differ from Traditional Disability Insurance

It’s important to distinguish Buy/Sell Disability Insurance from personal long-term disability (LTD) insurance. While both protect against the financial impact of disability, they serve very different purposes:

Feature	Traditional Disability Insurance	Buy/Sell Disability Insurance
Purpose	Replace lost income	Fund the purchase of business ownership interest
Policy Owner	Individual	Business or co-owners
Benefit	Monthly payments to insured	Lump sum or structured buyout payment to business or owners
Elimination Period	30-180 days	365-730 days (12–24 months)
Tax Treatment	Benefits taxable if premiums were tax-deductible	Premiums not deductible, benefits typically tax-free
Duration of Benefits	Until recovery or retirement	Fixed buyout schedule

Understanding these differences ensures that advisors select the appropriate coverage for each need.

Steps for Implementing a Buy/Sell Disability Insurance Plan

Step 1: Review the Current Buy/Sell Agreement

Start by examining whether the current agreement includes provisions for disability. Many agreements focus solely on death, leaving a major gap. Recommend a review with a qualified attorney to ensure full coverage.

Step 2: Determine Coverage Needs

Accurately assess the value of each owner’s interest and the potential cost of a buyout. This determines the benefit amount required for each policy.

Step 3: Work with an Insurance Specialist

A knowledgeable disability insurance specialist can help structure the right policy, taking into account elimination periods, payout preferences, underwriting, and carrier options.

Step 4: Coordinate with Legal and Tax Advisors

Ensure all documents—from the buy/sell agreement to the policy language—are aligned. Confirm that the funding structure complies with applicable laws and results in favorable tax treatment.

Step 5: Regular Review and Adjustment

Businesses change. Ownership evolves. Valuations increase. It’s essential to review buy/sell plans annually to ensure they still reflect the current structure and value of the business.

Case Study: Avoiding a Business Crisis

Consider the example of a professional services firm with three partners. One of the partners, Mark, suffered a stroke and was unable to work indefinitely. The firm had no disability buy/sell plan in place. The remaining two partners faced difficult choices:

• Keep paying Mark’s salary indefinitely

• Attempt a buyout with limited capital, putting strain on operations

• Face conflict with Mark’s family over ownership and decision-making

Eventually, the firm was forced to take out a loan to finance a partial buyout, delaying growth plans and causing tension among partners.

Contrast that with a similar firm that had disability buy/sell coverage in place. When their co-owner Amy was diagnosed with a debilitating neurological disorder, the policy paid out a lump sum. The firm executed the pre-agreed buyout, Amy’s family received financial security, and the business continued without disruption.

Final Thoughts: Why Financial Advisors Must Lead This Conversation

As a financial advisor, you’re not just managing numbers—you’re safeguarding futures. Your clients rely on you to anticipate risk and provide actionable solutions. Disability is one of the most overlooked risks in business continuity planning, but with the right preparation, it’s also one of the most manageable.

Buy/Sell Disability Income Insurance isn’t just a policy—it’s a promise. A promise to keep a business running, to uphold an agreement between partners, and to ensure that personal tragedy doesn’t become professional ruin.

At Financial Solutions Group, Inc., we partner with advisors across the country to implement smart, strategic disability planning solutions for business owners. Let us help you strengthen your clients’ long-term business health with the right strategies and tools.

Let’s Build Resilient Businesses Together

If you’d like to learn more about implementing Buy/Sell Disability Income Insurance for your clients or want help reviewing their current agreements, contact our team at Financial Solutions Group today. We’re here to support you every step of the way—with the expertise, resources, and dedication you can trust.

www.fsgbrokerage.com