Disability Buyout Insurance

Example

“The law firm's disability buyout insurance policy provided $500,000 to purchase retiring partner Johnson's 25% stake after his stroke left him unable to practice.”

Memory Tip

Remember 'Disabled partner = Buy them Out' - when a partner can't work, insurance buys out their share.

Why It Matters

Without disability buyout insurance, a business partnership could face financial strain trying to buy out a disabled partner while also replacing their contributions. This coverage protects both the continuing business operations and ensures the disabled partner receives fair value for their ownership stake.

Common Misconception

People often confuse this with regular disability insurance that replaces income, but disability buyout insurance specifically funds the purchase of business ownership interests. It's a one-time buyout payment, not ongoing income replacement, and typically has longer waiting periods than individual disability coverage.

In Practice

Three partners each own 33% of a consulting firm worth $1.5 million total. They purchase disability buyout insurance for $500,000 per partner. When one partner suffers a permanent disability after two years, the insurance pays $500,000 to buy his share, leaving the two remaining partners with 50% ownership each in the continuing business.

Etymology

Combines 'disability' from Latin 'dis-' (apart) and 'habilis' (able) with 'buyout' (purchasing someone's business interest), emerging as specialized business insurance in the mid-20th century as partnerships sought succession planning tools.

Common Misspellings

Related Terms

More in insurance

Other insurance terms you should know

See Also