What is disability buyout insurance? 2024 guide

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Sunny Yadav updated on 23 January 2024

Are disability buyout insurance and disability income insurance the same?  If not, how do they differ from each other? Read on!

Delve into its benefits and the intricacies of the insurance process. Also, discover the crucial steps involved, including setting up a robust Buy-Sell Agreement, the disability claim process, and the pivotal payout and buyout stages.

Get personalized quotes using our free comparator before you choose a plan to secure your business's future.

Disability Buyout Insurance: 5 Key Takeaways

  1. Ensures financial security for both disabled owners and remaining business partners.
  2. The process involves setting up a comprehensive Buy-Sell Agreement and more.
  3. Disability buyout insurance and disability income insurance are not the same.
  4. The cost varies based on factors like age, health, occupation, and benefit amount.
  5. Top options include Manulife, Sun Life, RBC, The Co-operators, and Desjardins. 

What is disability buyout insurance in Canada? 

It is a specific type of insurance designed to fund the purchase of a disabled owner or partner's interest in a business if they become unable to work due to a disability. Disability buyout insurance acts as a safety net for both the disabled owner and the remaining owners of the business.

Here are some of its benefits:

  • Protects the disabled owner: They receive a fair market value for their share of the business, providing financial security during their disability.
  • Protects the remaining owners: They can continue the business without having to come up with the money to buy out the disabled owner's share, preventing financial strain on the business.
  • Promotes business continuity: The buyout ensures a smooth ownership transition, minimizing disruption to the business.

Before choosing any policy, you should compare multiple plans from different providers to get the best deal. You can do it right here, using our comparator.

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How does disability buyout insurance work?

We can break the process down into several key steps:

Setting up the plan

  1. Buy-Sell Agreement: Create a legally binding buy-sell agreement that outlines the terms of the buyout, including the price of each owner's share and the triggering events for a buyout. You should review and update this Agreement regularly. 
  2. Policy Purchase: Each business owner takes out a disability buyout insurance policy on the other owners. The policy amount should be sufficient to cover the cost of purchasing the disabled owner's share, as defined in the buy-sell agreement.
  3. Policy Terms: Understand the specifics of the policy, including the definition of disability, the elimination period (waiting period before benefits kick in), and the benefit payment options (lump sum or installments).

Disability event

  • Disability Claim: In the event of an owner becoming disabled and meeting the policy's definition, a claim is filed with the insurance company. Documentation, such as medical records, will be required to prove the disability.
  • Elimination Period: The insurance company will wait for the elimination period to pass before reviewing the claim. This period ensures the disability is not temporary or fleeting.

Payout and buyout

  1. Benefit Payment: Upon approval of the claim, the insurance company pays out the benefit amount according to the policy terms. This could be a lump sum or scheduled installments.
  2. Share Purchase: Using the insurance payout, the remaining owners or the business entity (as defined in the buy-sell agreement) purchase the disabled owner's share of the business, based on the pre-determined price.
  3. Ownership Transfer: The ownership of the business is formally transferred to the remaining owners or the entity, ensuring business continuity.

Good to know

While disability buyout protects your business, consider separate disability income insurance for personal income replacement needs.

How does it differ from disability income insurance?

Disability buyout insurance and disability income insurance are both valuable tools for protecting yourself in case of disability, but they serve different purposes and have distinct key differences:

Focus

  • Disability buyout insurance: Specifically tailored for business owners, providing a lump sum to finance the purchase of a disabled owner's share in the business. Its primary concern is ensuring business continuity and financial security for both the disabled owner and the remaining owners.
  • Disability income insurance: Replaces a portion of your lost income if you become disabled and unable to work, regardless of your profession or business ownership. It supports your personal financial needs and living expenses during the disability period.

Benefit payout

  • Disability buyout insurance: Pays a lump sum equal to the value of the disabled owner's share in the business, as defined in the buy-sell agreement.
  • Disability income insurance: Pays a regular income stream, typically a percentage of your pre-disability income, for a specified period or lifetime.

Target beneficiaries

  • Disability buyout insurance: Benefits both the disabled owner, who receives fair market value for their share, and the remaining owners, who can continue the business without financial strain.
  • Disability income insurance: Primarily benefits the disabled individual to maintain their standard of living and cover personal expenses.

Eligibility

  • Disability buyout insurance: Only available to business owners who agree to participate and establish a buy-sell agreement.
  • Disability income insurance: Available to anyone employed or self-employed, meeting the insurance company's eligibility criteria.

Cost

  • Disability buyout insurance: Premiums tend to be higher due to the specific nature of the coverage and the potentially large lump sum payouts.
  • Disability income insurance: Premiums vary based on factors like age, occupation, health, and benefit amount chosen.

If you're new to this area, we've got you covered. Use our free comparator to easily explore the best disability insurance plans, compare their coverage, and get quotes tailormade for you.

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Personalized quotes are a click away

How much does disability buyout insurance cost? 

The cost of disability buyout insurance in Canada can vary significantly depending on several key factors:

  • Age: Premiums increase with age as the risk of disability rises.
  • Gender: Females typically pay slightly less than males due to statistically lower disability rates.
  • Health: Pre-existing medical conditions can significantly impact premiums.
  • Occupation: High-risk occupations generally face higher premiums.
  • Smoking status: Smokers pay higher premiums due to the increased health risks.

Other factors include:

  • Benefit amount: The larger the lump sum payout needed, the higher the premium.
  • Elimination period: Choosing a longer elimination period (waiting time before benefits kick in) can lower the premium.
  • Definition of disability: Stricter definitions can reduce the premium but limit coverage.
  • Policy term: Lengthier terms usually result in higher total premiums.

Good to know

Further affecting the cost would be business factors, such as the type of business — risky businesses may face higher premiums. Also, more owners often mean lower premiums per person. A stable business may qualify for lower premiums!

Here are some sample quotes to give you a better idea:

  1. For a 40-year-old non-smoking female office worker with a $500,000 benefit and a 90-day elimination period, the annual premium could range from around $1,500 to $3,000.
  2. For a 55-year-old male construction worker with a $1 million benefit and a 30-day elimination period, the annual premium could be closer to $5,000 to $8,000.
Factor40-Year-Old Female Office Worker55-Year-Old Male Construction Worker
Age
4055
Gender
FemaleMale
Occupation
Office WorkerConstruction Worker
Benefit Amount
$500,000$1,000,000
Elimination Period
90 days30 days
Estimated Annual Premium Range
$1,500 - $3,000$5,000 - $8,000
Disability buyout insurance cost in Canada

What is the best disability buyout insurance in Canada? 

Disability buyout insurance is available in Canada from several major insurance companies. Here are some of the best options.

Here are some of the popular providers:

  1. Manulife disability insurance: Offers a variety of options for businesses of all sizes, with flexible payout options and customizable terms.
  2. Sun Life disability insurance: Provides disability buyout insurance as part of their business owner protection package, along with other coverage like life insurance and critical illness insurance.
  3. RBC Insurance: Offers individual policies for business owners, along with group options for partnerships.
  4. The Co-operators disability insurance: Has disability buyout insurance available as part of their business continuity solutions, focusing on protecting smaller businesses.
  5. Desjardins disability insurance: Offers through their group benefits division, catering to both small and large businesses.

What are the things to keep in mind regarding disability buyout insurance?

Before you buy:

  • Review your buy-sell agreement
  • Understand the definition of disability
  • Choose the right benefit amount
  • Compare quotes from different insurers
  • Consult with a financial advisor and legal professional

After you buy:

  • Review your policy regularly
  • Communicate with your business partners
  • Maintain good health habits

Also, consider the potential tax consequences of receiving a disability buyout payout.

Disability buyout insurance is a valuable tool for business owners, but it's important to understand its specific features, considerations, and potential limitations.

Do your research and make informed decisions to secure your business and personal future. While it may seem daunting, we've made it simple for you. You can use our free comparator to compare plans from multiple providers and get quotes based on your unique needs right here.

Compare disability insurance

Personalized quotes are a click away
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Sunny has over six years of experience curating engaging content spanning across industries. Specifically in finance, his expertise is insurance reviews and lending and investment topics.

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