An Advisors' Guide to Excess & Surplus Disability Insurance

What Is Buy-Sell Disability Insurance & Why Is It So Important?

Posted Tue, Aug, 11th, 2020
By Exceptional Risk Advisors

Research shows that about 40% of business owners are financially prepared in the event their partner(s) dies.  However, only about 15% are prepared if their business partners are disabled.  When advanced preparations for such a possibility are not taken, the results are not only emotionally devastating, but financially devastating as well. 

For successful business owners maintaining a buy-sell agreement within their partnership, insuring the stock repurchase requirements in the event of a disability can prove challenging in US disability markets.  US disability carriers provide this type of insurance up to a benefit maximum of roughly $2-3M per insured (this benefit varies across carriers and the state in which coverage is being issued).   For business owners with additional Buy-Sell Disability funding requirements, a supplemental Disability Buy-Sell Insurance policy can be issued to reduce the business burden to repurchase a disabled partners equity beyond what is available from domestic carriers.

The need for small businesses to look at disability insurance as their business life-preserver in the event their corporate ship starts to list can't be understated. Some key items to keep in mind when discussing with your clients:

  • The largest asset that exists on the personal balance sheet for entrepreneurs tends to be the equity in their business.
  • Proper buy-sell planning with well constructed documents and properly funded and updated insurance plans are a must.
  • Although most businesses have life insurance protection, the greater risk of disability often goes unfunded as traditional disability carriers lack the ability to deploy the necessary capacity.
  • When compared to term life insurance, the cost of an equivalent amount of disability insurance looks high, yet death vs. disability statistics explain the pricing differential.

To help illustrate, we recently placed a buy-sell disability policy for five partners at a young Chicago investment firm valued at almost $40 million.  The advisor was asked to provide disability buy-sell coverage to fully fund their buy-sell agreement after 18 months of disability.  All five partners, in their late 30s and early 40s, worked with the advisor to create a plan that would afford them both time to recover from a debilitating event or diagnosis, and reduce the cost of funding the agreement.  A buy-sell disability solution was designed to fully fund the buy-out agreement and the partners could rest easy knowing a real solution was in place in the event one of them became disabled.  Furthermore, they were able to market their succession plan promoting the firm's stability and establish trust while courting new investors.  Click here for a copy of the case study.

Earlier this year, we hosted a webinar on business succession planning and in it, Ted Tafaro our Founder & CEO discussed how to add new lines of revenue by cross-selling life insurance with business succession planning plus other ways to differentiate your insurance practice.  If you missed it, you can watch the recording here.

Finally, we surveyed over 1,400 business owners to better understand the largest deficiencies in succession planning. Please enjoy a copy of our findings in this digital whitepaper!