If your long term disability insurance company raises the possibility of a lump-sum settlement, don’t make any fast decisions. Although often the response defaults to a no response.
When this occur, there is a lot at stake – your entire financial future – and once you’ve accepted a buy-out, the policy is terminated, permanently closed, and fully surrendered. No new claims can be made on it, and any future benefits tied to the plan are cancelled. Those collateral benefits, which exist in some cases, are of great benefit.
After careful consideration, negotiating a lump-sum settlement of a long term disability insurance claim must be done with great care. This article offers a limited look at what you’ll need to know. Anyone considering a settlement should consult with an experienced long term disability insurance attorney. The risks are simply too big.
What’s the difference between settlement of group policies and private policies?
Group policies, employer-sponsored benefits governed by ERISA, may have settlement and lump-sum buyout provisions, but they are less common than in private or individually owned LTD policies.
If you have a group disability policy from your employer with a lump-sum buyout provision, it’s subject to complex plan rules and policy limits. The insurance company may not allow any kind of negotiation. You’ll need to know exactly what the value of the policy is – don’t take the insurance company’s word for it – and use that as a starting point for the conversation.
Private or individual long term disability policy lump sum buyouts are different because private LTD policies are governed by state law. There are legal remedies available if there are disputes about private policies and insurance companies are aware of this, making negotiations more productive for claimants.
While you can sue the LTD company concerning buyouts, you may not want to. Litigation takes time and incurs costs which can take a bite out of your settlement. Having a skilled negotiator on your side is a smarter way to proceed.
What is your policy worth? Probably way more than you thought.
People always undervalue their long term disability policies. The typical response is to multiply the monthly benefit by 12 months, then multiply that sum by the number of years they expect to live. This simple math is what the insurance company is counting on you doing. If you rely on this equation, you’re doing yourself a great disservice. There are many, many more factors involved.
A group policy is purchased with payroll deductions, meaning the money used has not been taxed. For group policies, the impact of taxes needs to be taken into consideration during the negotiation process. A group policy lump sum settlement is fully taxable as ordinary income in the year it is received. Not only will the settlement be reduced by income taxes, but it may also push your household into a higher tax bracket.
Lump sum settlements from private policies have the distinct advantage of typically being tax free because premiums are paid using after-tax dollars. There’s no worry about taxes taking a bite out of the total amount or being pushed into a higher tax bracket when the settlement occurs.
What Could Go Wrong With a Lump Sum Settlement?
A lot can go wrong when claimants receive a lump sum settlement. Not everyone is a good candidate for this, no matter how attractive it is. Some questions to be considered before pursuing a lump sum settlement:
Is it possible that the claimant will need to move into a nursing home for extended care? The five-year lookback from Medicaid considers a lump-sum settlement from a disability policy as countable income. A lump sum settlement could delay Medicaid eligibility or cause them to lose eligibility while they are already in the nursing home. Payment would have to come out of pocket.
Will the claimant be able to manage the money over an extended period of time? Claimants who have an advisory team, including a financial advisor, CPA, and attorney, are more likely to create a strategic plan for stewarding a lump sum settlement. Letting your brother-in-law invest in a sure-thing is not the way to manage a settlement. Someone who is too ill to manage the money may not be a good candidate for a lump-sum settlement.
What if another disability arises? If you have some degree of recovery and can return to some type of work and then suffer another disability, you no longer have any LTD protection. It may be better to continue to receive benefits in this kind of situation.
Could you lose the money to divorce or a lawsuit? This is very unpleasant to contemplate, but it needs to be considered. If you are sued for divorce, the money could be part of a settlement. The same is true if you are sued or if you have debt.
Are There Benefits To Taking A Lump Sum Settlement?
Taking a lump-sum settlement and terminating a long term disability insurance policy can be a huge emotional relief. If the insurance company has persistently requested medical updates and examinations on a frequent basis, the end of the policy means the end of ongoing IMEs and FCEs and asking doctors for updates and test results.
A lump-sum settlement also means the end of worrying about surveillance. You no longer need concern yourself with an insurance company monitoring social media posts looking for proof that you aren’t disabled. There’s no threat of a car being parked near your home with a remote controlled camera tracking your coming and going from home.
There is a value to not having to feel the anxiety when every visit to the mailbox might include a letter from the insurance company asking for more information or terminating your claim.
Why a Talk with a Long Term Disability Insurance Attorney?
Jason Newfield speaks with claimants every day about their LTD concerns, and lump sum settlements are a regular topic. There are many situations where this is the best decision for a claimant, and times when it’s just not a good idea. While the decision is ultimately the claimant, take advantage of the opportunity for a free phone consultation with Mr. Newfield to learn more about your choices.
Do You Really Know How to Place a Value On Your Claim?
As discussed earlier, most people don’t know how to accurately value their LTD policies. In addition to the monthly benefits, there may be increases for inflation, or adjustments according to market indexes. Some policies have lifetime caps. Some end at specific ages, while others are for life.
Does the policy have a COLA rider – Cost of Living Adjustment—and if so, is the increase based on inflation or a fixed percentage?
The insurance company knows what your actuarial life expectancy is, has numbers for your medical risk rating and the probability that you may either recover, die, or dispute the claim.
These are just some of the factors to be considered when assigning a value to your claim.
Does a Settlement Make Sense for You and Your Family?
A lump sum settlement is not a decision to be made without serious, sometimes painfully honest, considerations about your disability, mortality, and financial situation. It’s not something to do without the help of a skilled disability attorney.
Claimants need to be very careful when dealing with long term disability insurance companies and settlements. The insurance company’s goal is to get your claim off its books at the lowest possible cost.
Your goal is to protect your interests. The more information you have, the better decision you can make.
We do not provide ANY tax advice as to the issues of lump sum settlements – that is for a CPA or tax lawyer.
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