Massachusetts Health & Accident Insurance Practice Exam

What characterizes a disability buy-sell plan?

1. It allocates company property to new employees

2. It funds the buy-out of a disabled co-owner's shares

3. It provides insurance benefits to customers

4. It offers tax deductions for employees

The correct answer is: It funds the buy-out of a disabled co-owner's shares

A disability buy-sell plan is specifically designed to address the situation where a co-owner of a business becomes disabled and is unable to participate in the operation of the business. In such cases, the plan provides a mechanism for the remaining owners to buy out the shares of the disabled owner. This arrangement is crucial for maintaining business continuity and ensuring that control does not shift to an outside party or remain in the hands of a non-active partner. The funding for this buy-out typically comes from insurance policies taken out on the lives of the co-owners. If a disability occurs, the insurance proceeds can be used to facilitate the buy-out, allowing the disabled owner to receive fair compensation for their share of the business while also protecting the interests of the remaining owners. The other choices do not accurately reflect the purpose or characteristics of a disability buy-sell plan. For instance, allocating company property to new employees pertains more to employee onboarding rather than ownership transitions related to disability. Providing insurance benefits to customers is outside the scope of a buy-sell plan, which focuses strictly on co-owner arrangements. Lastly, while tax implications may arise from business transactions, the primary function of a disability buy-sell plan is not to offer tax deductions for employees. Rather, it serves to