Buy-sell insurance is a non-cancellable disability insurance product. Once the contract is established, the insurer cannot revoke it or change its guarantees.
Also known as share redemption insurance, buy-sell insurance provides funds enabling other shareholders to buy out the shares of a disabled partner.
Depending on the option chosen by the insured, the insurance will pay out in a lump sum, a monthly benefit, or a combination of both.
The coverage protects the company's longevity, as shareholders can buy the shares without tapping into the company's or their personal assets.
A two player market
Essential for advisors targeting small and medium-sized enterprises (SMEs), buy-sell insurance has become a very narro market. Since Manulife stopped selling its Buy Sell Plus product in 2022, only two players offer it: Canada Life with its Disability buy-sell insurance, and RBC Insurance with Disability Buy Sell.
Shareholders of a mature company should not delay in deciding to cover for a partner’s disability. Both products set the underwriting deadline at 60 years. Coverage is available from the age of 18.
Canada Life and RBC Insurance both can cover a shareholder up to a maximum of two million dollars.
Other features vary depending on the insurer, particularly regarding payout options and waiting periods. A comparative table prepared by the product information center, InsuranceINTEL, provides the details.
Shareholders who delay insuring because they don't intend to buy a partner's shares may face surprises. For example, the family of the disabled shareholder might demand that other shareholders buy their partner's shares, even if they lack the means.
SMEs Under Pressure
This coverage gains relevance in a particularly difficult environment for businesses. The current economic climate may leave little room for them to buy a disabled partner's shares with their funds.
In an annual review, the Canadian Federation of Independent Business (CFIB) measured the confidence of SME leaders in 2023. It was the lowest since 2010. The year 2024 also looks challenging for entrepreneurs. Companies that had to use the Canada Emergency Business Account (CEBA) from the Canadian government are now facing the inevitable: repayment.
"It's time for eligible SME owners to repay their loan if they can." - Christina Santini
In a public statement made on January 11, 2024, the CFIB said, a week before the CEBA loan repayment deadline set for January 18, that it is very unlikely that the federal government will grant SMEs an extension to keep the grant portion of the program.
"Following many conversations with government, I'm convinced there won't be any last-minute extension to the current January 18 deadline," said Dan Kelly, CFIB president. "For business owners who remain eligible, now is the time to repay if you possibly can. There's only one week left to repay the loan while securing the up to $20,000 forgivable portion.”
Difficulty of repayment
"Over 900,000 small businesses are holding CEBA loans and 22% are not in a position to repay at this time, this decision has huge implications for Canada's economy" adds Kelly. The CFIB reports being flooded with calls from concerned members struggling to repay their loans and not receiving clear responses or assistance from the government and banks.
The high-interest rates don't help. The Bank of Canada has maintained its key interest rate at 5% since July 13, 2023, despite declining inflation. "Businesses are seeing the cost of servicing their debt rise while their revenue growth slows down," said Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, in a November 2023 speech on high-interest rates.
Ms. Rogers made this statement at an Advocis Vancouver event, a branch of the financial advisors association Advocis. "However, most of them are doing well, and the number of insolvency cases is comparable to what it was before the pandemic," she added regarding businesses.