In the event of a shareholder's incapacity, the possibility for their partners to buy back their shares requires an agreement (share buy-back agreement). It is advisable to fund this agreement with funds from disability insurance benefits.
Despite the importance of a well-funded shareholder agreement in case of one partner's incapacity, the choice of disability insurance providers for this purpose remains limited. Only Canada Life, with its Disability buy-sell insurance policy, and RBC Insurance, with its Disability Buy Sell policy, offer buy and sell disability insurance, according to information listed in InsuranceINTEL, the Insurance Journal Publishing Group’s insurance product information centre.
Canada Life and RBC Insurance offer their products as a non-cancellable disability insurance contract. Under such a contract, the insurer cannot revoke or modify the coverage during its term.
Both insurance products include several other features that will help channel the funds needed for the timely repurchase of shares from a partner who has become disabled, as shown in the table prepared by InsuranceINTEL for the Insurance Portal.
Target Market
In the InsuranceINTEL database, both insurers define their target market, which is essentially small and medium-sized businesses.
Canada Life states that its product is designed specifically for private business owners.
RBC Insurance targets it primarily at partnerships and professional corporations with two to five partners. However, the insurer does not exclude partnerships or corporations with more than five partners. It adds that its product will be useful for companies with few shareholders and fewer than 50 employees. It is targeting companies with revenues up to $10 million that operate in a stable industry.
Ensuring business succession
On its website, Peregrine Coast Benefits & Insurance Advantage emphasizes the importance of planning for changes in ownership to ensure the survival and growth of small businesses, both in the short and long term.
The Vancouver-based life insurance firm adds that it is also important to have life insurance that covers the buy-sell agreement in the event of a partner's death. It explains that funding a buy-sell agreement with life and disability insurance "can help make a difficult human resource transition easier by protecting your families, your partners, and the life of the business.”
“If your company’s buy sell agreement requires that the other owners or partners purchase a deceased or disabled owner’s interests, buy sell life or disability insurance can be used to fund your buy sell agreement,” explains RBC Insurance on its website.
The insurer adds that the policy can be held by the business, or each owner can hold a policy on each of the other owners.
In a chart on its website, which lists the main advantages of buy-sell disability insurance, Canada Life says that this product helps reduce the potential for resentment among shareholders or partners. It lists other advantages, including the ability to provide fixed-cost protection and reassure the business’s suppliers and creditors.
For its part, RBC Insurance dedicates a section of its website to key ideas and advice regarding critical illness insurance. The insurer explains that a buy-sell agreement is useful when a business partner becomes seriously ill. “Insurance proceeds may allow the remaining owners or the family of the sick partner to buy their share of the business. This keeps things running without disruption and may help with succession planning,” the document states.
Definition of total disability
Regarding disability insurance for share buybacks, Canada Life specifies in its benefits table that its benefits can be used to buy back the shares or ownership interest of a shareholder or partner who is “totally disabled.”
According to the InsuranceINTEL database, Canada Life and RBC Insurance define total disability as an injury or illness that results in the following consequences for the insured:
- they are regularly monitored by a physician;
- they are unable to perform the essential tasks related to their usual occupation.
When these two conditions are met, the insurer can pay the amounts in the form of a lump sum, a monthly benefit, or a combination of both.
Canada Life offers a benefit in the form of a single lump sum payment or monthly payments for 60 months.
At RBC Insurance, benefits can be paid as monthly installments, a lump sum, or a combination of both.
According to the information presented in the comparison table below, those who have not yet considered provisioning their buy-sell agreement with disability insurance would be wise not to delay. Both products available on the market set the enrollment deadline at age 60. Attention young entrepreneurs: coverage is available as of age 18.
