Lump-Sum Disability Insurance Buyouts Overview
A lump-sum disability insurance "buyout," or "settlement," is a one-time lump-sum payment. It's made to an individual policyholder to buy out the life of their policy or long-term disability claim. If you agree to a lump-sum buyout, you extinguish your rights under the policy. You release the insurance company from any further obligations under the policy.
After a buyout, you'll no longer have any rights against the insurance company. You'll no longer have a disability claim for which you'll receive disability insurance benefits. A disability insurance buyout may benefit you in the short term. But it could be to your detriment if the payout undervalues your policy's future benefit.
Why Consider A Lump-Sum Buyout?
There are many reasons to consider a buyout. All are unique to your financial situation. Carefully consider such an important decision.
The Ability to Invest Your Lump-Sum
A lump-sum buyout is often tax-free, but not always (consult a professional about tax implications). It allows you to invest the sum of money any way you see fit.
Rather than waiting for monthly payments from long-term disability insurance companies, you could use the buyout money to enlarge your retirement savings. Or you could make a financial investment that may bring large gains in the future.
You may want to enter into a new business. You may want to invest in new skills that don't conflict with your disability and medical condition. If you have children, you can invest in their future by paying for college tuition.
Security and Peace of Mind
Lump-sum buyouts can offer extra security for your family. As opposed to life insurance policies, disability insurance policies may not provide rights of survivorship.
Many insurance companies deny disability benefits after a period of time. The long-term disability policy often specifies this. After an initial period of receiving benefits because you cannot work at your "own occupation," some providers allow you to continue getting benefits only if you cannot work at "any occupation." This might reduce your disability payments.
A lump-sum settlement means the insurance company can't deny your benefits or terminate your claim. If you negotiate a buyout, you'll no longer have to submit supporting documentation from medical professionals to prove your need for long-term disability benefits.
Reasons to Reject a Lump-Sum Buyout
There are many reasons to accept a buyout offer. There are also reasons not to take a buyout.
If you've worked in an occupation with a "lifetime payout," if you've got a strong life expectancy, and your policy has a long benefit period, continuing might be beneficial. You may waste the buyout money by exercising poor judgment and making bad investments. The offer might undervalue your long-term disability insurance policy's future benefit.
Determining Your Policy's Actual Worth
To reduce costs, insurance companies calculate buyouts based on the amount they project they'll have to pay a policyholder in the future but at a reduced rate. Your insurance company will base your buyout offer on this reduced rate. This is your claim's "present value."
The present value of your policy is the amount you could invest now at a specified interest rate, so at the end of your policy's term, you'd have the same amount of money the company would've paid you in benefits. The higher the interest rate used to calculate your policy's present value, the smaller the lump-sum buyout offer will be.
If your policy includes a cost-of-living benefit, your insurance company may pay it as "simple" or "compound" interest. The company may also make another reduction based on when it believes you may die and if it thinks you may go back to work.
Your insurance company may also apply a final discount to make a profit and justify its buyout offer. Generally, if the lump-sum buyout amount is less than the expected future monthly payments, insurance companies will negotiate a buyout.
Should You Accept the Settlement Offer?
Getting a big check from your insurer may sound appealing at first. Sometimes, it is the right option. But, it's essential to consult with a disability insurance attorney or financial advisor before accepting a buyout offer.
A buyout negotiation is a complicated process. You'll want legal advice from a long-term disability attorney before deciding. They can guide you through the process, especially if it involves ERISA regulations. They can also help if there's a potential overlap with Social Security disability or workers' compensation.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.