Part of our guide: Long-Term Care Insurance: Costs, Options and Planning →
Most buy-sell agreements are funded with life insurance, which works when an owner dies. But what if an owner can’t work anymore because of a cognitive impairment or chronic illness, and doesn’t die? The life insurance doesn’t pay, and the healthy owner has no way to fund the buyout.
Key takeaways
- A standard buy-sell funded only with life insurance leaves a gap if an owner becomes unable to work but doesn’t die.
- An indemnity-style LTC rider on the same policy can pay monthly benefits to the policy owner to fund an installment buyout.
- In the example, a $350,000 policy paying 2% a month ($7,000) completes the buyout over 50 months.
A $350,000 policy with an LTC rider paying 2% a month funds a $7,000 monthly installment buyout, completed in 50 months.
The gap in most buy-sell agreements
If a partner can no longer participate because of cognitive impairment or a health condition, the business still needs to buy them out. Surrendering the life policy provides only its cash value, which is usually far short, especially on a newer policy. The alternatives are a bank loan or draining company assets.
How the LTC rider solves it
An indemnity-style LTC rider is an accelerated death benefit that pays when the insured is cognitively impaired or can’t perform two or more activities of daily living (ADLs). Because it’s indemnity-style, the benefit is paid to the policy owner, the co-owner or business, rather than reimbursing care expenses. Those payments fund an installment buyout.
Example: Sam and Dave
- Sam and Dave value their business at $700,000 and each buys a $350,000 policy with an LTC rider on the other.
- Dave becomes ill and can no longer work, and qualifies for benefits under the rider.
- After a 90-day elimination period, the rider pays 2% of the death benefit monthly: $7,000.
- Sam uses the payments to buy out Dave’s share in installments over 50 months.
Planning notes
The buy-sell agreement should be drafted to include a disability or long-term care trigger that matches the rider’s benefit terms. Tax treatment of accelerated benefits paid to a business owner depends on the policy and structure, so confirm with the client’s tax advisor. Disability buy-out coverage is another option; see including disability coverage in buy-sell planning.
Frequently asked questions
What happens to a buy-sell agreement if an owner becomes disabled?
Unless the agreement and its funding address disability or long-term care, the business may have no funds to buy the owner out. Life insurance only pays at death.
How can an LTC rider fund a buy-sell?
An indemnity-style LTC rider pays monthly benefits to the policy owner when the insured qualifies, which can fund installment buyout payments.
What triggers LTC rider benefits?
Typically cognitive impairment or inability to perform two or more activities of daily living, after an elimination period.
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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