What is a Long Term Disability Lump Sum Settlement?
A Long Term Disability (LTD) lump sum settlement or buyout is a one-time payment by an insurance company to resolve and end a claim. Once a payment is accepted, you surrender your right to any future monthly benefit and the LTD policy terminates.
Not all LTD policies offer this option. Review your LTD policy closely to see if it is included. The initial offer will almost always be the lowest possible number. Don’t try to value the claim without professional help—the policy is worth far more than a simple monthly benefit multiplied by the number of months the policy would be paid.
This should be negotiated with the help of an experienced long term disability insurance attorney.
Should I Accept a Long- Term Disability Lump Sum Settlement?
Every disability insurance claim is different, and there are no simple one-size-fits-all answers to whether or not or when you should settle your long term disability insurance claim. Instead, you should consider a series of factors and priorities, including but not limited to:
- Age and life expectancy of the claimant, accounting for co-morbid conditions;
- Financial security and other sources of income for claimant to determine true need to settle versus desire to be finished with process
- Likelihood of returning to work
- The strength of the claim (to evaluate the willingness of insurer to resolve)
- Whether the offer is objectively AND subjectively reasonable
If an offer were to be made, it truly is an individualized analysis and decision, driven by both tangible and intangible issues. For more than two decades, Newfield Law Group has offered guidance to disabled claimants to understand the process and guide them through this analysis, focusing on their unique situation and goals to achieve a successful outcome. We help determine if the resolution of the claim makes objective and subjective sense.
We recommend that our clients only settle their ERISA claims if it’s in their best interest and they fully understand the implications of a buyout.
Not all claimants are offered lump-sum settlements. Not every disability insurance company makes offers to claimants at all. This is because insurance companies consider a number of factors when determining whether a one-time payment is more cost-effective or a good business decision for their business instead of continuing monthly payments.
These factors will typically include:
- Your disability: If your condition is not likely to improve, it’s more likely you will receive a settlement offer. This is because the insurance company expects you to receive LTD benefits for the longest possible period. If the expectation is that they’ll have to pay you the full amount of the claim, the lump sum settlement is an attempt for the insurance company to reduce the amount it would pay.
- Your age: A young person has a greater chance of resolving their disability before the maximum benefit period is reached. The insurance company data may predict that you have a chance to improve and return to work, therefore they may be able to stop paying you at some point in the life of the claim.
- The lifecycle of your policy: Various circumstances point an insurance company to consider a claim “ripe” for resolution, or to determine it’s too early or too late for a settlement. Newfield Law Group works with clients to determine if the Goldilocks scenario exists.
How is an LTD settlement offer calculated by an insurance company? Is there a magic formula?
What Is Your Age and Life Expectancy?
Because you might receive disability insurance benefits for a lifetime (or until you reach retirement age), your age and life expectancy will significantly impact the value of your LTD claim. When you die, your benefits will end.
If you are a younger person with a high life expectancy and you cannot return to work, your lifetime of benefits will carry a significant value. For example, suppose you become disabled at age 45 and remain eligible for LTD benefits for 20 years. If your LTD benefit is $3,500 per month, you would get $840,000 in total disability insurance payments.
Unless the insurance company offers you a large buyout, it may be in your best interest to continue to receive ongoing benefits. However, if you’re an older or have other events driving this process, a lump-sum settlement might provide you with a nest egg for you or your loved ones.
What Is Your LTD Claim’s Present Value?
While your LTD claim might be “worth” $840,000 over 20 years, that is not its “present value.” Rather, that is an aggregate amount, over time.
Money is worth more today than it will be in 10 years due to inflation and other factors. Suppose you win $1 million in the lottery. You get two options: receive payments over time or take a lump sum. If you choose monthly payments, you’ll receive $4,000 per month for 20 years. However, if you accept the lump sum, you’ll get a check for $700,000 because when you add interest and inflation, those monthly payments have the same value as $700,000 today.
Potential Downsides to Accepting a Long Term Disability Insurance Buyout
Your Future Needs Could Change
Part of our calculations in deciding whether or not a lump sum settlement is worth taking for clients includes a look at current medical needs. However, if your condition worsens substantially, will your medical costs skyrocket?
If your LTD policy includes increases for medical or income benefits, you’ll want to continue on the monthly benefit path and that potential certainty. Once you accept a settlement, there is no going back.
You Could Face Serious Losses Due to Taxation
The settlement needs to be structured properly. Otherwise, you could potentially face a huge tax liability. You’ll also want to speak with a tax professional to discuss how the settlement can be configured to minimize any negative tax consequences. Tax guidance is often critical to these considerations.
Investments Can Be Risky
If you opt to take a lump sum settlement, you may receive far less than what you would receive over time. If you are able to invest the sum and have success in your investments, that’s great. But there are no guarantees in markets, and if the economy turns south, and stocks, bonds, and other standard investments fail to produce a good return, you could lose your settlement.
Taking a lump sum settlement can be an expensive, life-altering financial risk. Proceed with caution.
When actuaries calculate present value for these disability insurance companies, they must identify the appropriate rate of return and your expected duration of benefits, juxtaposed against other factors. It’s a complicated process that is best left to the experts. Don’t make the mistake of thinking the insurance company’s present value calculations are accurate. Insurers will always undervalue claimants’ benefits and try to convince them to take a smaller lump sum.
An experienced ERISA lawyer will consult with financial specialists who can properly calculate your claim’s present value and respond to the company’s offers and potentially make arguments to enhance the settlement offer.
Why Should I Settle? What Good Could Result from a Lump Sum Disability Settlement
Taking a lump sum settlement can make life simpler and provide numerous advantages.
You Receive Money Up Front
Receiving a lump sum settlement can enable you to pay off business or medical debts and stop the accrual of additional interest debt. This may reduce your anxiety level considerably.
Having access to a substantial amount of funds at one time can also enable you to maximize your investment potential. With the right timing, a good investment strategy and yes, luck, you might earn more than you would receive in monthly payments.
The Threat of Your Claim Being Challenged or Terminated Goes Away
As long as you are on claim, there is always the possibility that the insurance company will decide that you are no longer eligible for benefits and that they should be cut or stopped entirely. This monthly anxiety each month is an intangible factor which leads claimants to desire to resolve their long term disability insurance claims.
Taking a lump sum payout means you don’t have to worry about continuing to have your doctor file reports, go to more frequent medical appointments than you otherwise would, or go through the process of having your disabilities reassessed periodically. Moreover, you don’t have to worry about whether the insurance company is watching your every move.
Making an Informed Decision with Experienced Help
Ultimately, the decision to settle for a lump sum, if one is offered, becomes a very personal decision, weighing many factors, with unequal weights for every claimant. Newfield Law Group consults on these matters, in an effort to educate claimants about their rights and potential benefits.
