Long-Term Disability Insurance Buyouts: What You Need to Know
If your long-term disability insurer has paid monthly benefits for an extended period of time, they sometimes decide that a buyout is a more reasonable option. A long-term disability buyout is similar to a personal injury or workers’ compensation settlement. The insurer evaluates your claim and decides what they would be willing to pay if they could resolve it now instead of later.
What Happens When An Insurer Buys Out Your Disability Claim?
When you accept a buyout offer, you agree to a new payment arrangement. Instead of dealing with periodic disability reassessments and wondering how long your benefits will last, you agree to a lump sum settlement, and you walk away.
Your decision affects your long-term disability claim if:
- You and your insurer agree on a lump sum to settle your claim.
- You execute documents, signing away your right to receive additional payments for your disability.
- Even if your claim is subject to an aggregate limit, it no longer applies to your claim.
- Your lump sum gives you a single amount that resolves all current and future claims related to your disability.
- You no longer receive monthly disability payments.
Benefits Of A Disability Claim Buyout
When you’re receiving monthly disability insurance benefits, the payments provide a steady income stream. You live almost the way you did when you received a regular paycheck. If you accept a buyout, you receive a lump sum of cash. That’s the primary benefit to you. A lump sum gives you more financial options. The money meets your immediate needs and you don’t have to worry about getting denied.
It also allows you to choose based on your goals. You may:
- Fund your retirement account
- Invest in a way that earns you a higher interest
- Decrease your debt
- Start a small business
- Set aside money for your child’s college tuition
- Pay your medical bills
- Make a major purchase you’ve been postponing
You Can Leave Your Money To Your Family
Often, disability policies don’t have a survivorship provision. If you pass away, the insurer terminates your benefits, and your family receives nothing. When you take a lump-sum buyout, you worry less about providing for your family in your absence. Your lump sum lets you establish a trust or allocate money to your family in a will. If the unthinkable occurs, your children and spouse have access to the money you set aside.
Your Buyout Might Be Tax-Free
Based on IRS taxability guidelines, proceeds from your long-term disability policy aren’t always taxable. This includes your lump-sum buyout.
Taxability generally depends on whether you or your employer paid your insurance premiums.
- Non-taxable: You paid all of your premiums (check with your tax advisor).
- Partially Taxable: Both you and your employer contributed to your premiums (check with your tax advisor).
- Fully Taxable: You paid your disability premiums through a cafeteria plan, and you didn’t include them in your taxable earnings (check with your tax advisor).
If you have tax concerns about a potential lump-sum distribution, discuss it with a tax professional before you finalize your buyout.
You Avoid Adverse Claim Decisions
When you receive long-term disability benefits, you’re at the claim department’s mercy. The adjuster handling your claim doesn’t simply approve your payments and ignore your file. The longer your claim remains active, the more the claims adjuster scrutinizes you and your disability.
Claim handlers must periodically reassess your condition and update their claim reserves. Managers or supervisors constantly push them to reduce their caseloads. They’re always looking for a way to discontinue someone’s benefits so they can close one more claim. Buyouts allow them to accomplish these tasks.
The Disability Insurance Company Gains Buyout Benefits Too
Insurers don’t offer buyouts because they’re generous. They do it because it saves cash in the long run. Insurers understand that when you remain disabled over an extended period, there’s a strong chance that you will never return to work. If your disability policy pays you monthly insurance benefits for an extended period or over your lifetime, a buyout gives the insurer an opportunity to cut their losses.
Buyouts save insurance companies money for several additional reasons:
- When a company has fewer open cases, they require fewer paid claim handlers.
- Closed cases also reduce the need for paid administrative and support staff.
- Once the insurer closes your claim, they eliminate the costs of investigators, IME doctors, litigation fees, and other expenses.
- Closed cases reduce insurance company reserves and supplemental reserves, the money they must legally set aside for anticipated claims.
How Insurance Companies Calculate Your Buyout
In determining your buyout, insurers begin by calculating the potential policy payout over the life of your disability claim.
They consider several factors and usually require input from an economic expert.
- Your disability
- Your potential life expectancy based on your disabling conditions
- Your policy’s benefit duration
- Whether you qualify for extended disability benefits
- Your potential for returning to work
- The anticipated total amount of your future payments
- The present-day value of your future claim benefits
The process of setting a buyout amount isn’t an exact science. Just as with personal injury claim settlements, the insurer’s buyout offer isn’t set in stone. They anticipate that you will negotiate the final buyout figure before you reach an agreement.
You Can Reject A Buy-Out Offer
When an insurer approaches you about a claim buyout, you have the option of saying no.
Before you decide, you should consider these and other issues:
- Once you sign away your right to recover benefits, you can’t reopen your claim and you have no policy anymore.
- As you will no longer receive monthly benefits, your lump sum must be large enough to provide for your current and future expenses.
- If you have a long life expectancy, you must deal with the risk of running out of funds.
- If you’re still under treatment, you will need money for copays, deductibles, and uncovered medical expenses.
Contact A Long-Term Disability Attorney Before You Accept Your Buyout
If your long-term disability carrier offers you a buyout, consult with a long-term disability attorney before you agree. Insurers consider a number of factors before they make a lump sum offer. Attorneys help their clients review and consider the issues and negotiate a favorable settlement.
When you schedule a complimentary buy-out consultation, a long-term disability attorney reviews your coverage and talks about your disability claim. He discusses any pending buyout offers and determines how they can help you make an informed decision.