Long-term disability (LTD) benefits can be a lifesaver for people who are unable to earn an income due to sickness or injury. If you are not able to work for months or even years at a time, it is a relief to know that you will still be getting a monthly check to help pay for your necessary expenses.
Most LTD plans will pay monthly disability benefits for as long as you remain disabled or otherwise meet the policy’s requirements. However, you may have an alternative option: a long-term disability settlement or buyout. If you go this route, instead of ongoing monthly payments, you’ll receive a single lump sum payment and then your benefits will be terminated.
Disability insurance companies might offer a lump sum disability settlement if they think it will save them money in the long run. Some policyholders might also prefer this option if they need a significant amount of cash now, or if they believe they will come out ahead if they can invest and manage their own finances.
But is it a good idea? To answer that question, you need to understand what your long-term disability claim is worth. In this blog post, we will examine ways to do this.
What Factors Can Affect the Value of a Disability Insurance Policy Buyout?
There are a few major items that will be taken into consideration when valuing your long-term disability claim. While nothing compares to a disability insurance lawyer’s personalized assessment and calculations, here are a few factors you must consider.
The total value of your future disability benefits
This is simply your monthly benefit multiplied by the number of months left of coverage. If, for example, your monthly benefit is fixed at $3,000 and you have 15 years until benefits end, the full value of your long-term disability benefits would be $540,000 ($3,00 x 12 x 15).
If your policy includes an indexed cost of living adjustment (meaning the annual increase changes from year to year based on inflation, the Consumer Price Index, or another calculation), the exact total of your future payments will necessarily involve some estimation.
But either way, for the reasons below, your settlement offer will never be as high as the total sum of your future benefits.
The net present value (NPV) of your future benefits
The value of $3,000 today is not the same as the value of $3,000 in another 10 or 15 years. Inflation is the most obvious reason, but there are other factors to consider, too. For example, money that you obtain now can be invested and earn interest, which compounds over time. If you invest wisely, your future returns could greatly exceed your regular monthly benefit payments.
So, to calculate the buyout, the insurance company estimates what your future benefits will be worth using “present value,” or today’s dollars.
In general terms, present value is calculated by taking your remaining benefit payments and applying a discount rate. This estimates the monthly or annual discount for money paid now to be “worth” the same as money paid in the future.
Depending on how much longer your benefits are scheduled to last, this could result in your buyout value being significantly less than your total future benefits. Think of it this way: $2,000 in today’s dollars might be worth $2,100 next year, $2,550 in five years, and $3,250 in 10 years. So, the more years the insurance company is buying out, the lower percentage of the total you’ll receive.
Your life expectancy or mortality
If you die before your regular monthly benefits are scheduled to end, your payments simply stop. But if you take a lump sum, any money you save could be passed on to your heirs. If the insurance company believes you are unlikely to live to the end of your benefits period, they will offer you a lower buyout settlement.
How long you will need benefits
If the disability insurance company feels that you will be able to return to work before your benefits expire, or believe they will have a good reason to dispute your claim in the future, they may refuse to offer a buyout or reduce your buyout offer.
Generally speaking, insurance companies don’t offer buyouts unless they are very confident you will not be able to return to work at any point during your benefit period. If you request a buyout from them, they may even become suspicious that you are worried about losing your benefits—so this could backfire on you.
Pros and Cons of Taking a Lump Sum Payment
Taking a lump sum buyout comes with both advantages and disadvantages. If your insurance company offers to buy out your LTD claim, you will have to consider carefully which choice will be best for your unique circumstances.
Advantages to settling your long-term disability claim
The main advantage to taking the lump sum is that it puts you in more control over your long-term finances. You may feel that you will come out ahead if you are able to invest the money or make a large upfront purchase, rather than continuing to draw a smaller monthly benefit payment (which, due to inflation and cost of living adjustments, will not be worth as much later as it is today).
Another key advantage is certainty. Even if you’ve been receiving disability benefits for years, there’s no guarantee that your benefits will continue to be paid as normal until the end of your policy’s benefit term. There’s always a possibility that the insurance company will challenge your disability status in the future and attempt to terminate your benefits—or that you might pass away unexpectedly while still receiving benefits. By settling, you are not only free from having to deal with the insurance company, but you will know exactly how much money you’ll have to save, invest, and hopefully pass on to your heirs when you die.
Disadvantages to settling your long-term disability claim
The main disadvantage is that, once you settle, the matter is closed and you can no longer go back and receive regular payments. If you run out of money—whether because you mishandled it, or had additional unexpected medical expenses, or outlived your life expectancy, or any other reason—you will have no recourse.
For these reasons, it is extremely important to understand what your claim is truly worth before considering any lump sum settlement.
Key Points to Consider Before Accepting a Buyout
Deciding whether accepting a settlement is in your best interest? Here are a few questions to ask and thoughts to consider.
Can I handle the money responsibly?
A large lump sum of money can set you up for life, but it can also be easily squandered in a few short years if you fail to take adequate precautions or make risky investing decisions. We strongly encourage you to work with a financial advisor or estate planning attorney to make sure you have a solid financial plan.
Have I considered the tax implications?
Your long-term disability settlement may be taxable, non-taxable, or partially taxable depending on whether or not an employer contributed to your premiums, and whether you paid your portion of the premiums with pre-tax dollars or post-tax dollars.
If your monthly benefit payments were taxable, your settlement should also be taxable. And because you will be receiving it as a lump sum in a single tax year, those taxes could be substantial. Again, working with a financial advisor or tax professional is strongly recommended before accepting any settlement offer.
RELATED POST: Are Short and Long-Term Disability Benefits Taxable? – Bryant Legal Group (bryantlg.com)
Is the settlement offer fair?
Remember, the insurance company would not be making the offer unless it believed that it would save them money in the long run. Although you might agree that it is the better option for you as well, the insurance company has their own interests at heart—not yours. So, you should be extremely cautious about taking their calculations about the true value of your disability case at face value.
To calculate the present value of your benefits, the insurance company will use a discount rate that makes certain assumptions about inflation, rate of investment returns, and other factors. Almost certainly, these assumptions will be skewed in their favor—not yours. You have some room for settlement negotiations, but since the insurance company doesn’t have to offer a buyout, they won’t take any deal they think is bad for them.
You will need to carefully consider whether the terms of the settlement are reasonable, factoring in the total expected lifetime benefits, what you can reasonably expect to earn through investments, and what any of the other benefits of settling (e.g. financial certainty, not having to worry about your benefits being terminated later) are worth to you.
RELATED POST: When Should I Take a Disability Insurance Settlement or Buyout? – Bryant Legal Group PC
Should I Use a Long-Term Disability Buyout Calculator?
Many websites offer a free online calculator to estimate a fair value for your lump sum payout. While such tools can provide a rough and approximate starting point, it is important to understand that the true value of your case cannot be determined by a simple formula.
There are many factors to consider when making this kind of calculation, and the process is not always straightforward. The assumptions and projections the insurance company makes about your case may be quite different from those considered by the calculator.
As a result, you should always consult with a long-term disability lawyer before accepting any settlement offer. An experienced attorney can bring unique insight into how much your claim is truly worth and can provide you with impartial advice about whether a buyout makes sense for your unique circumstances—and if so, how much the insurance company would need to offer to make it worth your while.
Bryant Legal Group: Helping Disabled Individuals Secure Their Financial Future
Deciding whether to trade your monthly benefits for a lump sum payment may be one of the most significant financial decisions of your life. It may be hard to say no to a one-time check worth hundreds of thousands of dollars, but if you settle for too little, it could mean disaster down the road. A disability lawyer can protect you and help you make a wise decision.
At Bryant Legal Group, serving our clients is always our top priority. Our attorneys have decades of experience representing disabled individuals and helped them secure the benefits they deserve, fight unfair denials, and plan for their long-term future.
If you are working through a disability claim, or deciding whether a buyout is the right decision, our experienced attorneys can talk you through your options, weigh the pros and cons, and help you make the right choice for yourself and your family.
Contact a long-term disability attorney in Chicago today by calling 312-561-3010 or completing our online form.