Buy/Sell DI – Its Importance and Potential Pitfalls
Americans are extending working careers and business ownership longer than ever before in this country, making succession planning so vital in maintaining business continuity and balance when an owner decides to finally hang it up and enter a life of retirement.
But how do you avoid financial catastrophe during a regime change and the partial or entire sale of a thriving business? You employ a thoughtfully constructed, fully funded buy/sell agreement, outlining the procedural turnover of the business to one or more individuals, including partners, employees and/or outside parties. This is a natural and proper action as long as life runs smoothly and expected. But we all know that life can throw unexpected curveballs such as the permanent disablement of the business owner, forcing a premature buy-out of the business.
In most instances of unforeseen disability, successors won’t have the capital necessary to fully fund the purchase of the disabled owner’s shares. Chaos ensues and the business suffers or even defaults. The solution is buy/sell disability insurance. A comprehensive buy/sell DI policy will properly fund a purchase agreement at the time of the permanent disability of an owner through a lump sum or structured monthly benefit to sufficiently address the monetary needs of the buy/sell contract. Benefits usually begin after a common elimination period of at least 365 days.
Most domestic disability insurance carriers offer proper “own occupation” policies designed to indemnify buy/sell agreements, but there are always shortcomings and fiduciary challenges that insurance advisors must heed.
Traditional DI companies have limitations that will preclude some of your clients from being properly covered. Age limitations are common. Most policies will either employ declining benefits once an insured person reaches the age of 60 or will completely cease to offer any benefits to clients of that age or older. This is a great problem considering that persons over the age of 60 are more susceptible to disablement than their younger counterparts.
Benefit limitations in general are also common amongst domestic carriers. Rarely will a traditional buy/sell DI policy be able to provide funding over $1,000,000 even though the buy-out value of a company may be much higher. Excess or high-limit buy/sell coverage is frequently needed.
Petersen International offers solutions to those unfortunate predicaments. Buy/sell insurance is available through PIU up to $50,000,000 or more in excess of the lower limits provided by traditional DI carriers. Furthermore, the benefits offered by PIU don’t dissolve once an insured person reaches the age of 60 or 65, and initial policies can be written on business owners over the age of 70. PIU is also able to offer buy/sell disability insurance to persons declined by domestic carriers due to impaired risks such as health, occupation and avocation concerns.
Please contact Petersen International at (800)345-8816 to learn more about our succession planning solutions and how we can minimize your clients’ corporate risks with unique insurance platforms.