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Disability Buy Out Insurance

Your client's partner's disability could cost them if their buy-sell agreement has a page missing. Few business owners realize that, as far as their business is concerned, there is no real difference between actual "physical" death, and the "living and economic" death caused by an owner's lengthy disability. Yet chances are that their buy-sell agreement lacks a disability buy-sell provision.

Advantages to a healthy owner

  • The healthy owner maintains 100% ownership and continuity of management.
  • There is a smooth transfer of interest because conditions of the buyout, the purchase price, and the funding method have been predetermined.
  • The firm's continued existence is assured and profits will not be depleted.
  • Benefits are received income tax free.

Advantages to disabled owner

  • He is assured of a buyer at a predetermined and fair price
  • He receives cash for his share of the business.
  • There is freedom from the risk of future company losses.
  • Family members won't have to become involved.

CONSIDER THE ODDS

The odds are high that either you or one of your business associates will suffer a disability of 1 year or more, before age 65. (see table)

# in Group
1 2 3 4 5
Age 25 11.67% 21.98% 31.09% 39.13% 46.23%
30 11.34% 21.40% 30.31% 38.22% 45.22%
35 10.98% 20.75% 29.45% 37.19% 44.09%
40 10.50% 19.90% 28.31% 35.84% 42.58%
45 9.83% 18.70% 26.69% 33.90% 40.40%
50 8.83% 16.88% 24.21% 30.90% 37.00%
55 7.24% 13.96% 20.19% 25.97% 31.33%
60 4.61% 9.02% 13.21% 17.22% 21.04%
Source: 1985 Commissioner's Disability Table (male, based on 30 day elimination period) combined with the 1980 Commissioner's Standard Ordinary Mortality Table.

DISABILITY BUYOUT TAX FACTS

  1. Premiums paid by partnerships and corporations are not deductible, but benefits are received tax free (IRC 265; IRC 104 (a)©).
  2. A shareholder's interest in a corp. is a capital asset. Hence whether purchased by the corp. or a third party, the purchaser of the interest cannot deduct his payment for Federal income tax purposes.
  3. When an installment buyout takes more than one year, a minimum interest rate is set by the IRS, and must be paid by the purchaser.


BERKSHIRE/GUARDIAN'S DISABILITY BUY-OUT POLICY

FUNDING METHODS

Three funding methods are available for pay out of benefits under a Disability Buy-Out policy; monthly, lump sum, or down payment. The method by which benefits will be paid is selected by the insured at the time of application.

  • Monthly Funding- Under this method, following the waiting period, Guardian will pay at the end of each month, the actual monthly purchase price up to the monthly benefit limit.
  • Down Payment - Following the elimination period, Guardian will pay a lump sum equal to the actual down payment paid as part of the purchase price, not to exceed the down payment benefit shown in the policy. At the end of each month after that, Guardian will pay the actual monthly purchase price, but not more than the policy's monthly benefit limit.
  • Lump Sum - If the lump sum method is chosen, following the elimination period, Guardian will pay the actual lump sum paid as the purchase price, up to the maximum benefit limit. In lieu of a lump sum, the benefit can be paid in guaranteed installments over a period of ten years or less.

TOTAL DISABILITY BENEFIT

Total Disability or Totally Disabled means that, solely due to Injury or Sickness, You are not able to perform the material and substantial duties of Your Occupation and You are not Gainfully Employed by the Business.


HOW A DISABILITY BUYOUT WORKS / CORPORATE STOCK REDEMPTION

BEFORE DISABILITY
Before Disability

AFTER DISABILITY
After Disability

Opes One Advisors
FOR BROKER USE ONLY. NOT FOR PUBLIC USE.