Insurance funding guarantees a certain amount of cash will be available at the exact time it's needed, thus leaving cash assets and future business earnings intact (generally, companies do not insure the full market value in disability buyouts). And while any other funding method involves using 100-cent dollars (plus interest, in the case of a loan), disability buy-sell insurance can be purchased with discounted dollars.
Many insurers offer special disability buyout insurance plans for use in funding disability buy-sell agreements (individual disability income policies cannot be used for this purpose). This protection may be purchased in addition to coverage in an individual disability policy or salary continuation plan.
To avoid coverage gaps, it's very important for the buy-sell agreement to define "disability" the same way as the insurance contract defines it (or refer to the policy definition). Similarly, the "trigger" point when the buyout is to be implemented should be the same in both the agreement and the policy.
Once the agreement is implemented, a compulsory buyout is completed following the elimination period spelled out in the contract. The elimination period in typical disability buy-sell policies is one or two years of total disability.
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