Arizona Life and Health Practice Exam

In a disability buy-sell agreement, who owns the policies funding the agreement?

1. The business owners

2. The insurance company

3. The business entity

4. The beneficiaries

The correct answer is: The business entity

In a disability buy-sell agreement, the business entity owns the policies that fund the agreement. The purpose of the buy-sell agreement is to ensure that if one of the business owners becomes disabled and is unable to participate in the business, there is a mechanism in place to buy out their interest in the company. The business entity being the owner of the policies allows it to directly benefit from the payout if a disability occurs, enabling the remaining owners or the business itself to acquire the disabled owner's share of the business efficiently. This structure ensures that the funds are readily available to facilitate the transition of ownership in accordance with the terms set out in the agreement. Having the business entity as the owner also helps in maintaining clear financial arrangements and tax implications. The benefits from the insurance policy are typically used to purchase the interest of the disabled owner, allowing for a smooth transition and minimizing disruption to the business operations.