Certified Financial Consultant (CFC) Practice Exam

In a disability buy-sell agreement, who typically handles the funding of the agreement?

1. The insurer

2. The business partners

3. The beneficiaries

4. The attorney

The correct answer is: The business partners

In a disability buy-sell agreement, the business partners typically handle the funding of the agreement. This arrangement allows business partners to ensure that their interests in the business are protected in the event one of them becomes disabled and is unable to continue their participation in the business. The partners usually agree on a plan that outlines how the purchase of the disabled partner's share will be funded, often through a combination of life insurance policies or mutual agreements to buy out the affected partner's share. This approach provides liquidity to the business so that the remaining partners can acquire the ownership interests without straining the company's finances. The businesses benefit from having predetermined funding mechanisms that are designed to be effective immediately when a disability occurs, thereby ensuring that the ownership transfer can happen smoothly and efficiently. While insurers may provide the necessary policies to cover the financial aspects of the agreement, the actual responsibility for managing and funding the buy-sell agreement typically lies with the business partners themselves, who are directly impacted by any disability situation.