Person holding tablet with app on screen titled disability insurance


Victor Peña Law PLLC Feb. 25, 2022

According to the Council for Disability Awareness, one in four of today’s 20-year-olds will become disabled before they retire. More than 37 million Americans, or about 12 percent, are classified as disabled, with more than half of them still in their working years, 18-64.

Also, according to the Council, a typical 35-year-old male stands a 21 percent chance of becoming disabled for three months or longer in his career, with the average being 82 months. For a 35-year-old typical female, there’s a 24 percent chance of facing a disability of three months or longer, with 82 months again being the average.

These statistics and odds are reason enough to protect your future by purchasing long-term disability (LTD) insurance. Many companies offer group LTD policies, and private insurers like Mass Mutual, Guardian Life, Principal, The Standard, Nortwestern Mutual, Mutual of Omaha, New York Life and others offer policies you can purchase on your own.

These policies provide monthly benefits based on your income before becoming disabled to help you cover your living expenses. Commonly, these policies provide these benefits should your disability last until you turn 65 or age of retirement. Others even last for your lifetime.

What if, while you’re receiving these monthly payments, you suddenly need a cash infusion, or you decide you’d rather have money in the bank to invest than rely on monthly benefits? Can you trade your monthly benefits for a lump sum?

The answer is that it depends on the insurance company and the terms of the policy. Some insurance companies will strategically offer you a buyout, so they can close out your account – and save money since what they offer will no doubt only be a portion of their total liability toward you.

For all your questions about your LTD policy, including the potential for a buyout, contact us at Victor Peña Law PLLC. Based out of Fort Lauderdale, Florida, our firm handles cases in any city throughout the country.

Can You Negotiate a Buyout?

The answer is often “yes” since the insurance company sees it as an opportunity to save money. The buyout will most likely represent only a portion of what the monthly payments would total should they continue for the duration of the LTD policy.

If you’re considering a buyout, the first part of the equation is calculating the sum of your benefits going forward.

Say the policy terminates at age 65, and you’re receiving $3,000 a month at age 45. That means you’re receiving $36,000 a year, and the total you’d receive by age 65 would be $720,000. That’s a pretty big figure, but remember that the insurer will likely reduce that amount for a buyout. If they offer you $500,000, would it be worth it?

Reasons to Seek a Buyout

One of the biggest factors in negotiating and agreeing to a buyout (remember, the insurer may also strategically offer you a buyout to get you off their books) is the prospect of inflation.

As of 2022, inflation is running high and could reach 10 percent for the year. This means, in the example above, your $3,000 a month would be worth only $2,700 in buying power in 12 months. Should inflation continue, the erosion could get worse. You might do better to have a lump sum to invest.

Some individual policies have cost-of-living (COLA) riders that increase your monthly benefits by a formula stipulated in the policy, which could be a fixed rate like 2 percent a year, or more generously, be tied into the consumer price index (CPI). If your policy has a COLA rider, it may make more sense to continue with the monthly payments or negotiate a higher buyout.

A reason many seek a buyout is the potential for setting up an estate for your family. If you’re receiving monthly payments and you suddenly pass away, the payments will stop, and your family could fall into financial straits. You could take the cash and set up a trust fund.

You may also view getting a lump sum as a vehicle for starting a business on your own or for investing it wisely so that you might end up with more cash to work with.

Seeking a buyout will also mean you no longer have to submit to periodic questioning and demands by the parent insurance company for medical follow-ups. A buyout will also end any surveillance the insurer is using on you – monitoring your social media accounts and even having videographers trail you in public.

Consequences of a Buyout:
Reasons Against

If, beyond your disabling conditions, you are generally healthy and have no major risks of dying prematurely, a buyout will cause you to give up 30 to 40 percent of your future benefits. This could represent a significant amount of money so the choice to do a buyout should not be taken lightly.

There can be tax consequences as well. Depending on who paid for your LTD policy – you, your employer, or both – your monthly benefits may be tax-free or taxed entirely or partially. The portion that your employer pays is generally taxed 100 percent. The portion you pay is generally not taxed at all.

So, if you have a company-sponsored LTD plan and the company paid half and you the other half, 50 percent of your benefits would generally be taxed. If the company paid all premiums, the tax is generally 100 percent of the amount received monthly. If you paid 100 percent of the premiums with post tax dollars, the benefits are generally not taxable.

Another consideration is to ask yourself how prepared you are to handle a sudden cash infusion. If you get $600,000 and it has to last 20 years, that’s only $30,000 a year to live on, unless you make wise investments or start a business that turns you a nice profit.

Remember, once you accept the buyout, you can’t go back and ask for more benefits. The insurer is done with you.

How a Knowledgeable
Attorney Can Help

Negotiating a lump-sum buyout for your LTD policy is not something you want to do on your own. The insurer is going to lowball the initial offer. There may also be riders and clauses in your policy that can present hurdles should you opt for a buyout. 

An attorney needs to review not only your policy but also any documents the insurance company sends you to sign. Once you sign, you may be stuck with terms and conditions unfavorable to you or with a low-ball buyout.

Based out of Fort Lauderdale, Florida, our firm handles cases nationwide, including Los Angeles, Seattle, New York City, and Chicago.

If you’re weighing the option of an LTD buyout, call us now at Victor Peña Law PLLC.