For those receiving long term disability benefits from a private insurer, at some point you may receive a lump sum buyout offer. Whether or not to accept the offer is a big decision with lasting consequences. Because so many factors can affect the decision, it is wise to involve professionals such as an attorney, accountant, and/or financial advisor to help you decide about your particular circumstances. But here are the basics you need to know.
What Is a Lump Sum Disability Buyout Offer
If you are receiving private long term disability benefits, the insurer pays you a set benefit amount each month for as long as you remain disabled, until the end of your policy. A lump sum buyout offer is a one-time sum of money that the insurer is willing to pay you at once to end the policy now. If you accept the offer, you relinquish your rights to your monthly benefits.
Why would an insurer offer this? In most cases, a buyout offer saves the insurer money in the long run. But some beneficiaries may prefer the lump sum offer for a variety of reasons.
Lump sum buyouts are optional, so if you do not accept the offer, your monthly benefits should continue to be paid as per your policy for as long as you remain disabled.
Contents of the Offer: The Numbers
Included in the buyout offer are typically a couple key numbers: the maximum value of your benefits as currently being paid if they continue for the maximum period of your plan, the present value of that number, and the lump sum buyout offer itself.
The maximum value of your benefits is relatively easy to calculate. Let’s say your policy has 10 more years (120 months) at a value of $1,200 per month. 120 x $1,200 = $144,000
But the present value is more complicated. The insurer will make various calculations to come up with this number. It includes factors such as the expected mortality and morbidity rates of individuals receiving this type of settlement offer (in other words, how likely you are to pass away or return to work) as well as potential future investment/interest income that could be earned on the money (like compound interest in reverse). Other factors may be the expense of settling claims, inflation, and cost of living adjustments (if they apply to your policy). These various factors may reduce the present value down significantly from the maximum value of your benefits.
Then the insurer will further discount their offer from the present value. Remember, the insurer is looking to save themselves money, so the offer may be only 50%-85% of the present value.
The written offer will include a settlement agreement so that if you choose to accept the offer, you will need to sign and notarize the document and then return it to the insurer.
Finally, the insurer may offer you an additional reimbursement of $750-$1,500 (whether or not you accept the buyout) to consult with an attorney, accountant, and/or financial advisor to make your decision. I strongly suggest you make use of this option to consult with professionals regarding the specifics of your situation. In addition, an attorney may be able to negotiate the lump sum offer, depending on the insurer.
How It May Affect Your Other Benefits
If you are currently receiving Social Security Disability benefits (SSDI), accepting a lump sum offer from your private insurer should not affect your Social Security benefits. However, it may increase the portion of your benefits that are taxable.
If you are currently receiving benefits from your employer, such as medical insurance or contributions toward a pension plan, you should contact your benefits administrator to determine if accepting the lump sum offer would affect these benefits.
If you are receiving Medicaid or other income-restricted benefits, accepting the lump sum offer may disqualify you.
Pros and Cons to Consider
There are a number of reasons a beneficiary may want to accept a lump sum offer.
- Having a lump sum rather than waiting for monthly benefits may allow you to wipe out existing debt, pay medical bills, or achieve some other financial goal.
- Managing a lump sum puts you in greater control and could allow you to invest the money and reap returns.
- Accepting the lump sum offer means you will no longer be subject to documenting your disability to the insurer. There is no danger of the insurer terminating those benefits if you can no longer prove your disability.
- You suspect your disability will improve and you think that you may be able to return to work in the future.
- If you die, you could pass on your benefits to your heirs.
On the other hand, there are some important downsides to consider.
- Because the insurer is looking to save themselves money, the offer they make to you may not be a fair one.
- With a lump sum distribution, you will be responsible for the taxes. Depending on your tax situation, you may owe a considerable amount.
- If you are not an effective money manager, you may not be able to make your money last over the period of time you need it.
- As mentioned earlier, receiving a lump sum payment may disqualify you from receiving Medicaid or other income-restricted benefits.
Our Own Experience
My wife Suzanne has been receiving long term disability benefits for years due to her rheumatoid arthritis and other conditions. Recently her insurer called and told her that because it was expected that she would continue to be disabled through the policy maximum (another 15 years), they would be offering a lump sum buyout for her policy.
This was a bit emotional because while she had no expectations of going back to work, it can be hard to hear someone say that you are expected to be disabled for the remainder of your working years.
A week later, she received the offer in the mail. Although we had done some research about disability buyout offers, we were still a little surprised at how low the offer was, but we thought an attorney would be able to do some negotiating. The insurer gave a 30-day period for my wife to consider the offer before it would expire.
She contacted a disability attorney who examined the offer and made his own calculations. Finally, he explained that because in her particular situation the benefits are for a relatively low monthly amount (most of her benefits are paid from SSDI) over a long period, the present value really cut into the maximum value. So although what the insurer was offering was “fair” from their side, it was not a good deal for my wife. Even if the attorney were able to negotiate some improvement to their offer (which seemed unlikely in this case), it still would not rise to the threshold of a good deal from her side. Also, we knew that we would owe taxes on the lump sum which made the offer even less appealing. So after careful consideration, she declined the offer.
What happened next? The policy contract is still in effect, so as long as she continues to be disabled, she will continue to receive her monthly benefits as before until the end of the policy.
Getting your long-term disability benefits approved can be quite challenging to begin with, so coming to the crossroads of a lump sum disability buyout offer can be a major decision. It’s important to take into account the specifics of your situation, so I encourage you to consult a professional, particularly if the insurer is offering to reimburse you for their fees. Consider the pros and cons and decide wisely, as this decision will affect your situation for what could be many years to come.