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When you’ve been receiving benefit payments through a long-term disability insurance policy—or sometimes at the time you are approved for benefits—the insurance company may offer you the opportunity to take a lump sum settlement in lieu of monthly payments. The appeal of having a sizeable sum to invest for your future or pay off debts has undoubted appeal. After all, most professionals have the skills or connections to make profitable investments that could produce more money than the monthly payments.

However, before accepting a buyout of this type, it is important to consider several critical factors. As a legal team that focuses on private disability insurance claims for professionals, the legal advisors at Seltzer & Associates know that disability insurance policies are complex and contain terms that often lead to unpleasant surprises. You need to understand all the details before taking any action.

Understanding Disability Insurance Payments

Disability insurance is a coverage you purchase to pay income benefits to make up for amounts you would miss if you were unable to work due to a physical or mental disability. These policies pay benefits when you can show that a physiological problem, mental health condition, or cognitive impairment prevents you from continuing to work.

Disability coverage can be provided through both short-term and long-term policies. Short-term coverage generally lasts only a few months at most, so a lump sum buyout option would only be offered for a long-term disability policy. Generally, if you have been approved for long-term disability benefits, you receive a payment once a month until either you are able to return to work or until the policy reaches the end of its term, which could be at the time you reach retirement age or it could be much sooner.

When an insurance company offers a lump sum settlement, it is designed to take the place of the monthly payments. This differs from payments made under workers’ compensation and other programs where a lump sum disability settlement may be offered while other benefits continue to be paid on a monthly basis.

Weighing the Positive and Negative Aspects of a Lump Sum Settlement

The benefits of accepting a buyout can be easy to assess, and they hold universal appeal. For that reason, it may be helpful to consider the potential drawbacks first. Before making a decision, it can be helpful to consult a financial advisor as well as an attorney who deals with disability insurance and understands the business. If you have a friend in the insurance business, they might help you with an honest assessment, but in general, advice from an insurance representative is going to be skewed in favor of the insurer, so you are better off seeking guidance from an unbiased yet informed party.

It can take time to assess the choices fully, so you might want to start considering the issue even before you have been offered a lump sum settlement so that you’ll be ready if the option becomes available.

Potential Problems When You Accept a Disability Insurance Buyout

While it may seem like accepting a lump sum puts you in control, no one can predict the future, and there will be some factors that are out of your control. Consider the following before making a decision.

Your Future Needs Could Change

A lump sum settlement will be based on current medical needs and expectations. But what if your condition worsens substantially? If your policy provides for increased medical or income benefits, you will gain those additional benefits only if you are still receiving monthly benefits. Once you accept a lump sum payout, you will be prohibited from receiving additional benefits for that disability.

You Could Face Serious Losses Due to Taxation

If the settlement is not structured advantageously, you could potentially face a huge tax liability if you accept a lump sum settlement. It is a good idea to consult a tax professional to learn the impact and find out how to mitigate negative tax consequences.

Investments Can Be Risky

When you opt to take a lump sum settlement, the amount you will receive will be less than what you would receive over time. This is not a problem if you are able to invest the funds profitably with a good rate of return. However, in situations where the economy turns south, and stocks, bonds, and other standard investments fail to produce a good return, you may be tempted to invest in something with even greater risk. 

Taking a lump sum settlement is a gamble, and it can potentially be a very costly one. If you know you are tempted to take risks or lack the knowledge to invest prudently, you either need to have the discipline to rely on wise financial investors or stick with the security of steady payments over the long term.

Benefits That Could Result from a Lump Sum Disability Settlement

While accepting a buyout can be risky in some ways, it can mitigate risks in other ways. Taking a lump sum settlement can make life simpler and provide numerous advantages.

You Don’t Have to Worry About Benefits Being Reduced or Terminated

As long as you are receiving monthly payments, there is always the chance that the insurance company will decide that you are no longer eligible for benefits and that they should be cut or stopped entirely. Taking a lump sum payout means you don’t have to worry about it. You also don’t have to go through the process of having your disabilities reassessed periodically, which can save you considerable time and effort. Moreover, you don’t have to worry about whether the insurance company is watching your every move.

You Receive Money Up Front

If you have substantial business or medical debts, receiving a lump sum settlement can enable you to pay off the balance and stop the accrual of additional interest debt. This can 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 a little work and the right timing, you could earn substantially more than you would receive in monthly payments.

Factors to Consider

As you prepare to weigh the pros and cons, there are specific factors you should take into consideration. You will need to review the terms of your insurance policy closely and be certain you understand the details.

• Are benefit payments set to end after a specific amount of time, or can they continue until retirement age? The answer will be in your insurance policy.
• What is your life expectancy? If your condition has shortened your life expectancy, you may be offered very little as a buyout.
• Does your policy provide death or survivor benefits? Accepting a lump sum is likely to remove the potential for your family to receive payments after your death.
• Are you likely to recover?

You’ll need to consider the overall picture, such as whether you need immediate funds to settle debts or the security of long-term, predictable income.

For most people, there is no clear right or wrong choice, so it will come down to the choice with the most benefits or the least risks, depending on your preferences. You need to feel comfortable with your choice, so obtain the advice you need to make an informed decision.

When You Need Help with Disability Insurance, Seltzer & Associates is Ready to Assist

Disability insurance should provide a reliable safety net when a disability prevents you from working. Unfortunately, it is a tangled net full of hidden holes because insurance companies will often do anything they can to avoid paying benefits on your policy.

At Seltzer & Associates, we understand disability insurance inside and out. We help professionals in all fields obtain the benefits that disability insurance companies wrongfully try to withhold. If you’d like help understanding the terms of your coverage, filing a claim, or appealing a denial of benefits, we’re ready to help. Just contact us online or call 888-699-4222 to set up a free, confidential consultation.