Part of our guide: Disability Income Insurance: Solutions, Tools and Guides →
Most buy-sell agreements are funded with life insurance alone. That works if an owner dies, but an owner is more likely to become disabled than to die during their working years, and life insurance won’t pay for that buyout.
Key takeaways
- Life insurance funds a buyout only at death; disability buy-out insurance funds it if an owner can’t work.
- It provides cash for the business or co-owners to buy the disabled owner’s interest, and pays the disabled owner for their equity.
- Reviewing existing buy-sell plans is a natural way to add disability, key person, and personal DI coverage.
If a partner becomes permanently disabled, life insurance pays nothing. Disability buy-out coverage funds the purchase.
The gap in most buy-sell plans
If an owner becomes too sick or injured to work but doesn’t die, the business still needs to buy them out, and the disabled owner needs to be paid for their equity. Without funding, that means loans, installment payments from cash flow, or conflict. See also using an LTC rider to fund a buy-sell.
What disability buy-out coverage does
- Provides funds to purchase a disabled owner’s interest after a defined elimination period, often 12 to 24 months
- Pays the disabled owner for their equity, as a lump sum or installments
- Complements life insurance within the same buy-sell agreement
The agreement should define disability consistently with the policy.
A success story
A producer asked us for a basic term life policy on a business owner. When we raised disability in the continuation plan, the result was an individual DI policy for the owner, with plans for the key executives underway. It was the producer’s first DI sale with us.
Getting started
Offer clients with existing buy-sell policies a complimentary review. We provide fact finders, valuation questionnaires, and approach letters. The review often leads to key person disability and personal DI sales.
Frequently asked questions
What is disability buy-out insurance?
Coverage that funds the purchase of a business owner’s interest if they become totally disabled, under a buy-sell agreement.
How long is the elimination period for disability buy-out insurance?
Commonly 12 to 24 months, to confirm the disability is long-term before the buyout.
Does life insurance cover a buyout if an owner becomes disabled?
No. Life insurance pays only at death; disability buy-out insurance covers the disability scenario.
Reviewed by Tim Fuller on 2026-09-25
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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