in this session we will look at the features of a disability Buy sell agreement for business owners as discussed in other sessions there are certain categories of risks that business owners face and we want to focus at this time on the disability of a business owner uh which may trigger the need to sell that business and so uh we will talk about disability Buy sell agreements and the fact that these can be established upfront and also one can purchase a spec specific type of disability income policy that can be used to fund the buyout of a business in the event that one of the shareholders or one of the principles in that business uh become disabled so let's take a look at the concept of a disability Buy sell agreement and disability buyout insurance so on the disability of a business owner uh uh there are an awful lot of concerns that are appropriate to the business now this is not true only on the disability of the owner but certainly these similar concerns arise on the death of a business owner or even potentially the critical illness of a business owner so they're always around these three issues there are always concerns around what will happen to the business uh can the family continue to operate the business do the family have the uh skill set to do that does the family want to continue the business and so you know in many situations where that business is usually the most significant asset in the family of a small business owner uh if the owner is disabled or dies how can we uh convert their equity in the that business into liquid cash so that the family can continue to live and maintain their lifestyle and maybe someone else would be able to carry on the business so uh business concerns on death disability or critical illness are significant to a business owner and even if we were to be able to continue that business uh a lot of the employees if something happens to one of the the principles of the business employees become concerned about their jobs is the business going to survive uh am I going to have a job in the future maybe uh things are uncertain and so uh some of your employees and especially maybe some of your key employees maybe thinking about leaving the company and joining another organization so retaining those key employees uh is a key point when looking at the ongoing profitable and successful continuity of a business now in addition to that uh if a you have one or more owner and let's say one of the owners becomes disabled will the remaining co-owners support a nonproductive disabled owner and they may do that for a short period uh so they understand the issue they are willing to take over uh the role of that individual in the short term but if this disability extends Beyond a longer uh period then some uh key discussions have to be made and you know the co-owners may not be willing to continue to uh support the disabled partner uh over the longer term and so you know how how would in for example how would the co-owner feel if uh suddenly one of the children or one of the the spouse of the disabled partner has to now become more involved in the business how do the co-owners feel about the family members joining into that business so there are a lot of issues uh critical issues that arise in the event of the death disability or critical illness of a business owner now it's always important that these issues should be discussed in advance and there should be a plan in place in the event something like this occurs so uh unfortunately in the real world uh you know there are a lot of situations where these things are left undiscussed by the business owners and and uh you know they run into significant problems if a wellth thought out plan is not in place so one of the solutions to this issue is the situation where the owners can in fact enter into a formal binding agreement and this type of an agreement documents exactly what is to happen if one of the owners uh becomes uh disabled or dies uh and it documents exactly what's going to happen to that owner's portion of the business uh is it to be sold uh if it is to be sold who is going to be buying it if they are going to be buying it how much are they going to be paying and in addition to that where are they going to get the money to make the purchase so all of these kinds of uh criteria are usually documented in a formal binding agreement in that agreement you know the price in terms of how we're going to calculate the value of the business there's a formula in that agreement and the conditions of the purchase are in that agreement what's also important in that agreement is that the parties to that agreement are obligated so one party is obligated to sell if they become uh disabled because we're talking about disability uh Insurance in this segment but obviously if we're talking about death under a life insurance Arrangement uh we also would want this to be an obligation so the survivors if it's a death situation the surviving shareholders are obligated to buy the shares of the deceased uh owner uh and the deceased owner's estate they're obligated to sell so uh there is always this uh obligation in place on both parties in our discussion today because we're focusing on disability uh we're saying here the parties are obligated to buy and sell in the event of the disability of one of the parties to that agreement uh as I alluded to many agreements will cover not only disability but they will include death and critical illness and they will have insurance in place to cover uh the death scenario so the agreement will be funded by a life insurance policy in event of death uh the agreement will be funded by a Disability Policy in the event of disability and can also be funded by a critical illness policy if they want to cover that uh scenario now back to disability uh policies uh and death policies uh there are two types of ways you can set up the ownership uh we can have a crisscross situation where you know Pol uh business owner a will own a policy on the life of business owner B and business owner B will own a policy on the life of of business owner a this is the crisscross method so the insurance is actually owned by the co-owners personally they own it on each other's lives uh the other option is the share Redemption structure uh wherein we get the incorporated business to own the uh policies on each of the let's say we had two partners they' own the policy on each of the business partner uh in the event of a claim the money would be paid to the incorporated business and the incorporated business would redeem the shares of that deceased or that disabled partner and uh then the surviving partner uh would then become the owner of the business so uh there's much more uh discussion about crisscross and share Redemption uh formats for these types of agreements under the life insurance module uh you can refer to these if you have forgotten about them or you want to find out some more detail on these types of ownership structures so the features of the disability uh buyout insurance that would fund this agreement uh really would be specified that under the agreement that they must have disability insurance in place to fund the obligation of either party uh these disability buyout insurance plans tend to have a regular occupation definition of disability uh you know usually it says you are unable to perform your regular duties within the business and you're not engaged in any other occupation inside or outside of the business so this is tends to be the standard definition under the regular occupation disability definition now for some professional practices these are businesses you could have a uh Dental uh Clinic you might have a a medical clinic where it's owned by a number of uh medical practitioners or doctors so for these sort of professional practices some insurance companies will sell you the Disability Policy with an own occupation definition now these plans are conditionally renewable and non-cancellable so they're going to be renewed each year but there may be uh some changes to the premium uh on the policy but for an entire class of risk that's involved uh they tend to have a waiting period that's usually longer than we would see on other individual disability plans these tend to be uh 12 to 24 month waking periods and one of the reasons for that is that what's different with disability buyout insurance is unlike regular disability insurance where you get a monthly benefit paid to the individual during their disability uh the issue with a buy sell agreement is that once one part decides to buy out the other party it's usually better for them to make the payment in a lump sum and so disability buyout Insurance in fact the benefits paid comes in a lumpsum payment so it's a one lumpsum payment after the waiting period so uh essentially what happens on these types of programs you basically are giving the disabled individual up to about a year up to about 12 minute months to see if they can be re rehabilitated and get back to contributing on a normal basis so there tends to be this extended waiting period if after 12 months uh there is no improvement and it doesn't look like the individual is going to recover fully that may trigger the obligation under the buy sell agreement agreement and at that point in time once that purchase is triggered the lumpsum payment from the disability in buyout insurance plan is made to the uh purchaser and they'll use that money to complete the purchase so in that situation technically the benefit period is simply one day because you're receiving a lumpsum check so different than our traditional individual disability and group type of disability plans in that the waiting period is can be you no longer 12 to 24 months the benefit period is simply one day because there is going to be a lumpsum payment made uh on this plan uh maximum coverage uh usually a million to $2 million is the total lumpsum risk that uh insurance companies would be willing to take for these types of disability buyout plans so uh again uh take a look at table 5.1 where there is a good summary of all of the uh risks that businesses can face and the different types of insurance policies that are designed specifically to address those risks