When Should I Take a Disability Insurance Settlement or Buyout?
When you’re in the middle of a long-term disability (LTD) or ERISA dispute, the insurance company might offer you a settlement or buyout. While this offer might seem generous (and tempting) at first, you should be cautious. Insurance companies rarely offer a fair settlement in their first offer — and you could lose out on valuable compensation if you accept.
In this article, Bryant Legal Group outlines the essentials of disability insurance settlements and when it’s best to accept a lump-sum payment.
What Is a Long-Term Disability Settlement or Buyout?
When the insurance company approves your LTD claim or a court grants your benefits, you should receive these payments on a monthly basis. If your condition does not improve, these benefits might continue until you reach retirement age. That’s a significant financial obligation for the insurance company, and they’d love to cut these costs.
When you settle your ERISA claim, you give up your right to ongoing benefits in exchange for a lump-sum payment. Once you accept a buyout and the insurance company issues you a check, you will no longer receive any disability insurance benefits — and, if you change your mind, you cannot go back and demand more compensation at a later date.
When Should I Settle My LTD Claim?
Every ERISA claim is different, and there are no simple cookie-cutter answers to when you should settle. Instead, you should consider a series of factors and priorities:
- Age and life expectancy
- Financial security and other sources of income
- Likelihood of returning to work
- The strength of your claims (if the company is disputing your eligibility for benefits)
- Whether the offer is reasonable
At Bryant Legal Group, we guide people with disabilities through this analysis, focusing on their unique situation and goals. We believe that you should only settle your ERISA claim when it’s in your best interest and you fully understand the complications of a buyout.
We provide our clients with the time and information they need to make sound decisions. We also fiercely advocate for them, fighting on their behalf to ensure a fair lump-sum payment.
4 Considerations Before You Settle Your ERISA Claim
While everyone should consult with an ERISA lawyer to get a personalized analysis of their claim, there are a few key considerations in any disability insurance settlement.
1. 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 $2,500 per month, you would get $600,000 in total LTD payments. Unless the insurance company offers you a large buyout, it will likely be in your best interest to receive ongoing benefits.
However, if you’re an older person or are facing a terminal or life-threatening condition, a lump-sum settlement might provide you with a nest egg for your loved ones after your death.
2. What Is Your LTD Claim’s Present Value?
While your LTD claim might be worth $600,000 over 20 years, that is not its “present value.” 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 in interest and inflation, those monthly payments have the same value as $700,000 today.
When actuarial scientists and banks calculate present value, they must identify the appropriate rate of return and your expected duration of benefits. It’s a complicated process that is best left to the experts.
However, don’t assume that the insurance company’s present value calculations are accurate. Insurers frequently undervalue claimants’ benefits, trying 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.
3. Will You Pay Taxes on Your Buyout?
A settlement from some disability plans, such as those you pay for with after-tax dollars, are not taxable. However, you might end up paying the IRS and Illinois Department of Revenue after settling certain ERISA claims. If your settlement is taxable, your lump sum could be reduced by more than one-third (depending on your tax bracket).
Before you settle your LTD claim, you should consult with an experienced disability lawyer who can help you understand the tax and financial implications of the proposed buyout.
4. Do You Have a Financial Plan for the Future?
A $300,000 settlement might seem like a financial windfall. However, if you’re unable to work, this amount will quickly disappear as you pay bills, receive medical care, and tend to your family’s needs.
Before you settle your ERISA claim, ask yourself:
- Do you have other sources of income?
- Are you receiving Social Security benefits?
- Do you have a clear understanding of your future medical and long-term care needs?
- Are you comfortable managing your settlement and following a budget?
If you don’t have good and carefully considered answers to these questions, accepting a lump-sum payment might not be a good idea.
Bryant Legal Group’s Practical Client-Focused Approach to Disability Law
At Bryant Legal Group, our top priority is our clients. That’s why we work closely with them at every step of the way throughout their claim, helping them make informed decisions that benefit them and their families. While we’ve built a reputation for working with professionals with disabilities in and around Chicago, we proudly serve the entire state of Illinois.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.