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Disability Buy Out (18DBO)

More Benefits, Mlore Programs and More Savings!   This updated Disability Buy-Out (Policy Form 18DB) released 4/20/20 and replaces DBO (Policy Form 3200) in states where approved. Disability Buy-Out provides funding to buy out a disabled partner in the event of a prolonged total disability.


DBO Basics:

DBO (Policy Form 18DB) State Avail.Why Disability Buy-Out (DBO)How Disability Buy-Out (DBO) WorksSetting Up a Buy-Sell Agreement




DBO Riders, Design and Features:   

Disability Buy-Out (DBO) FeaturesDisability Buy-Out (DBO) Optional RidersDisability Buy-Out (DBO) Tax TreatmentDisability Buy-Out (DBO) Valuation
Disability Buy-Out (DBO) Specimen PolicyDisability Buy-Out (DBO) Page Outline









Disability Buy-Out (DBO) (Policy Form 18DB) State Availability:

The new Disability Buy-Out (DBO) product is now approverd in all states.  


Why Disability Buy-Out (DBO):

Few business partners have a plan in place to help protect their business in the event of a prolonged or permanent disability of an active partner.  If disability strikes you or any of your partners it can be devastating to your business.

Potential Conflicts if an Owner/Partner Becomes Disabled:

  1. The disabled owner may want to continue drawing a salary & share in profits.  This results in a dual cash drain on the business because the business may have to pay salary to the disabled owner and hire a replacement at the same time.

  2. The disabled owner may become more conservative regarding business risk.  This may result in conflict, resentment and hampered decision making that prevents company growth.

  3. If the disabled partner is incapacitated or has impaired decision making ability, the family of the disabled owner may want to have input to the running of the business.  This can also result in hampered decision making.

  4. The disabled owner may have a financial crisis due to lost income, lack of immediate cash to fund treatments, and maintain standard of living.  This may result in the owner selling their share of the business at a discount if they can find a quick buyer. 

  5. The active owners may not have a voice in who purchases the interest from the disabled partner.  This can result in a new partner the remaining partners did not choose or want.  

  6. With having a disabled partner remain with the firm or practice, customers, creditors, and employees may become uneasy about the company's future.  This can result in loss of revenue, loss of key employees, and possible calling of loans from creditors or refusal of credit. 

Other than insurance, there are other funding mechanisms that can, in theory, provide funding to buy out a disabled partner, but those options have inherent problems:

  • Using Cash (Personal or Business): Will there be enough easily accessible cash available to fund the buy-out if the price is hundreds if not millions of dollars?  Will the timing be appropriate and will the money be available on a tax favorable basis.  Even if the money could become available wouldn't the cash be better used for growing the business?

  • Creating a Sinking Fund:  Will your company be able to accumulate the necessary funds that can be used in a rainy day where a partner becomes disabled?  If so wouldn't that money be better used as working capital for your business?

  • Installment Payments: Does it make sense to put a substantial drain on the business at the worst possible time (disability of a partner)?  As noted above it is very common for the business to loose both employees and customers when a partner becomes disabled.  Making payments that drain resources from a business in turmoil does not make much long term sense.

  • Borrowed Funds: Most banks and lending institutions are not willing to loan money to a company where one of the active owners is disabled.  Even if a loan is obtained, it is likely to not be at a favorable interest rate.  Additionally, the repayment schedule will put a similar stress on the business as installment payments would do. 

The ideal way to protect yourself and your partners is to have a Disability Buy-Out insurance benefit to fund the Buy-sell Agreement should a partner become disabled.  Why fund the buy-out obligation with insurance? 

  • Dependable: The burden of providing the money is shifted to the insurer and it is paid when needed.

  • Economical:  The risk of disability is transferred to the insurance company for a cost effective premium which is a small fraction of the benefit if needed.

  • Effective: The owners can custom tailor their buy-out program to meet their specific needs.  

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How DBO Works:

Disability Buy-Out policies are specifically designed to fund a disability buy-sell agreement.  It is a reimbursement contract that pays upon obligation of the buy out agreement provided that the insured meets the definition of total disability in the policy.  The definition of disability is true own occupation that includes "and you are not gainfully employed by the business."  

The DBO policy has longer elimination periods than other forms of disability policies.  The reason for this is that an owner of a business may not want to give up ownership of their business unless they have a long term disability.  The available elimination periods are 12 months, 18 months and 24 months.

Benefit options:  There are three options for benefits to be paid which is chosen at time of underwriting:

  1. Lump Sum: The full policy benefit is given at the end of the elimination period.  This is the most expensive option.
  2. Monthly Installment:  The benefit is spread out over a specified period of time.  The available options are 12 months, 24 months, 36 months, 48 months, or 60 months.  This is the lowest cost option.
  3. Downpayment:  This option is a combination of Lump Sum and Monthly Installment options.  In this option part of the benefit is paid in a lump sum and the remaining benefits are paid under one of the monthly installment options.

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Setting Up a Buy-Sell Agreement: 

The Buy-Sell agreement is required to be in effect within one year after the disability buy-out policy goes in force.  The Buy-Sell agreement defines how an owner's interest will be purchased if he or she withdraws from the business, retires, dies or becomes permanently disabled.  It helps ensure that a business or professional practice can continue after the total disability of one of the owners or partners.  It does this by requiring the partner to sell his or her interest to the remaining owners (or business itself) under terms defined in the agreement.  The remaining owners are required to purchase the business at a prior agreed to price and terms defined in the agreement.  The agreement is mutual and is written to be fair to all parties involved.  We recommend that you obtain your disability buy-out policy first before having the agreement written up in case the amounts requested are not issued as applied.  We feel there is no reason to pay your attorney twice if not necessary.

There are three basic ways to arrange the set up of DBO policies.  Consult your attorney and tax advisor for which option may be best for you and your business:

  • Cross Purchase:  Each partner owns a policy on the other partners.  The policy funds separately each partners obligation to buy out the disabled partner.
  • Entity Purchase:  There is one policy per partner.  The policy pays benefits to the business and the business buys out the disabled partner.
  • Cross Purchase with Trustee:  There is one policy for each partner.  In the event of disability the trustee receives benefits from the policy and uses the funds to buy out the disabled partner as per the buy-out agreement.

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DBO Policy Features:

  • Business Valuation Formula is Part of Policy1:  All DBO carriers perform a valuation test when issuing the policy as well as prior to payment of benefits.  One competitive feature is that you need not worry about changes in the valuation formula at time of claim because the formula is part of the policy.

  • New One-Way Buy-Sell Availability: The policy can now provide the funding necessary to facilitate the one-way buy-sell should total disability occur. In past minimum of two partners needed to apply for DBO.

  • Occupational Rehabilitation, Modification and Access Provisions:  The policy will cover an agreed upon plan to help policy owners return to their business.

  • Waiver Of Premium Benefit:  Premiums are waived during total disability while you are eligible for benefits.  Any premiums paid that is attributed to the disability period is refunded.

  • Transfer of Coverage Option:  This feature preserves the insured's medical insurability in the event the owner leaves one business and joins another.
  • Premium Options: The premium options available are Annual, Semi-Annual, Quarterly, Monthly List Bill (3 or more insureds minimum) or GOM (Guard-O-Matic monthly Draft).  The Semi-Annual, Quarterly, & Monthly List Bill, & GOM options contain modal charges.  

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DBO Optional Rider2:

  • Future Increase Option (FIO):  This option provides the policy owner the opportunity to increase their DBO benefit each year until age 55.  The maximum issue amount that yearly can be purchased is $150,000 but the FIO yearly amount can not exceed the policy benefit if less than $150,000.  Exercised increases can be issued as a separate policy or added to the base policy via an Additional Benefit Rider.

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DBO Tax Treatment3:

The premiums of a DBO policy are not tax deductible  and the benefits are received tax free.  However, there may be capital gains on the increase above basis.  Note this website does not give formal tax advice.   Speak to a CPA for all tax questions.

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Disability Buy-Out (DBO) Business Valuation:  There are three options:


  • Gross Receipts: This amount is based on the average business’ annual gross receipts for the three tax years immediately prior to the date the owner becomes disabled.
  • Net Worth:  The formula uses a valuation based on two years of average total owner compensation plus company net worth.

  • New: Traditional: The traditional method uses an independent certified public accountant to determine the fair market value of the owner’s interest as of the date the owner becomes disabled.

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DBO Specimen Policy:

Disability Buy-Out (DBO) Specimen Policy 18DB Series 3-2024

Note: Policies vary slightly from state to state.   The PA specifically specimen is used as an example. 

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DBO Product Page Outline:

Disability Buy-Out (DBO) (Policy Form 18DB) State Availibility
Why Disability Buy-Out (DBO)
How Disability Buy-Out (DBO) Works
Benefit Options: Lump Sum, Monthly Installment, Downpayment
Setting Up a Buy-Sell Agreement
     -Cross Purchase
     -Entity Purchase
     -Cross Purchase with Trustee
Disability Buy-Out (DBO) Features
     -Business Valuation Formula Part of the Policy
     -New One-Way Buy-Out Availability
     -Occupational Rehabilitation, Modification and Access Provisions
     -Waiver of Premium Benefit
     -Transfer of Coverage Option
     -Premium Options
Disability Buy-Out (DBO) Optional Rider: Future Increase Option (FIO)
Disability Buy-Out (DBO) Tax Treatment
Disability Buy-Out Business Valuation Options: Gross Recipts, Net Worth, & New Traditional
Disability Buy-Out (DBO) Specimen Policy


1 The business value determined by the Business Valuation Endorsement is one of several factors used to determine the Disability Buy-Out benefit payable. As such, the Disability Buy-Out benefit amount may differ from the business value determined by the Business Valuation Endorsement. See policy specimen “Provisions Related to Benefits” for additional details.
2 Optional riders are available for an additional premium.
3 This website is provided for informational purposes only and should not be considered tax or legal advice.  Please contact your tax or legal advisor regarding the tax treatment of the policy and policy benefits.  You should consult with your own independent tax and legal advisors regarding your particular set of facts and circumstances.  The information provided is not intended or written to be used, and cannot be relied upon, to avoid penalties imposed under the Internal Revenue Code or state and local tax law provisions.


Policy Form 18DB, 3100 & 3200 underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of The Guardian Life Insurance Company of America, New York, NY.    This policy provides disability buy-out insurance only. It does not provide basic hospital, basic medical or major medical insurance as defined by the New York State Insurance Department. The expected benefit ratio for this policy is 55%. This ratio is the portion of future premiums that the company expects to return as benefits, when averaged over all people with this policy.  Policy Form AH84 in California and Montana provided by Guardian.      

2020-108713 exp 11/22

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Financial Representatives of the Guardian Life Insurance Company of America (Guardian), New York, New York. Financial Growth Partners is a wholly owned subsidiary of Guardian.  Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. This website contains the opinions of the author but not necessarily those of The Guardian Life Insurance Company (Guardian), New York, NY or its subsidiaries and such opinions are subject to change without notice.  Important Disclosures:  Terms and Conditions    Privacy Policy

This website is intended for general public use. By providing this content, The Guardian Life Insurance Company of America, and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation.

Individual disability income products underwritten and issued by Berkshire Life Insurance Company of America (BLICOA), Pittsfield, MA or provided by Guardian. BLICOA is a wholly owned stock subsidiary of and administrator for the Guardian Life Insurance Company of America (Guardian), New York, NY. Product provisions and availability may vary by state. 

2024-171414 Exp 4/26