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Victor Peña Law PLLC March 17, 2022

According to the Council for Disability Awareness, a young 20-something just entering the workforce after high school, college, military service, or vocational training stands a one-in-four chance of facing a disability that will prevent them from working for more than a year.

Accidents may be one cause, but they are not the leading one. Back injuries, cancer, heart disease, and other illnesses are responsible for most long-term absences from work.

Unless you’ve saved up for that proverbial “rainy day,” your year-plus with no paycheck can be a huge strain on your lifestyle and your basic ability to survive in a nation of ever-rising costs. 

That’s why many employees choose a long-term disability plan offered at their place of work, or they may even buy one themselves from insurance companies such as Unum, The Hartford, MetLife, New York Life, or Lincoln Financial.

If you do have an LTD policy and go out on disability, you will receive monthly cash benefits from your insurance provider. At some point, either you or the insurer may decide that it’s better to convert the monthly payments into a lump-sum settlement.

At Victor Peña Law PLLC, many of my want to know if an agreed-upon buyout settlement is subject to taxes, which could reduce the desirability of settling. The IRS definitely has an answer for you, but you should consult with me and my team before you accept a settlement. There may be ways to reduce any tax liability you face.

My firm is located in Fort Lauderdale, Florida, but I proudly serve clients with LTD cases in any city in the country. I understand how insurance companies operate and can represent your interests to help you achieve the best possible settlement, and my team is ready to work with you on tax issues.

Benefits of a Long-Term Disability (LTD) Policy

An LTD policy, whether purchased at work or on your own through a private insurer, will generally cover 50-80% of your wages should you develop a disability that prevents you from working. These policies will often include an “elimination period” (or waiting period) before the benefits will kick in, which might last up to 12 months.

The policy also may include clauses concerning “current profession” and “any profession.” 

What this means is that the policy may provide benefits only for a set period — maybe 24 months — if your disability prevents you from working at the job you held when you became disabled. When that period is over, the insurer may demand that you seek another job that you can perform with your disability. If you don’t, they might cancel you, and even if you do, they might lower or even eliminate your monthly benefits.

Some policies also may offer cost-of-living adjustment riders that increase the benefits yearly on a set percentage basis or based on the consumer price index published by the federal government.

Another factor to consider is how long your particular LTD policy guarantees payments. Some will pay until your retirement age, others for the length of your life.

All of these factors should be considered in seeking or accepting a lump-sum settlement.

Benefits of a Buyout or Lump-Sum Settlement

Insurance companies are constantly weighing what they call their exposure — or liability — and at some point, they may decide that it’s more financially beneficial for them to offer you a lump-sum buyout than continue with the monthly payments. Naturally, this offer will be in the insurance company’s favor, saving them money over the long run, but you can also negotiate for a better deal.

As the beneficiary, you may also decide that you’d rather have the money up front to invest it or set up a trust fund for your family, so you might request a buyout on your own.

You then have to do the math. If you’re 55 years old and the insurer is paying you $3,000 a month in benefits until retirement age at 65, that means you have $360,000 in monthly benefits awaiting you. If the insurer agrees to give you $300,000 to settle everything, is it worth it? That really depends on your situation.

If you die before the age of 65, the payments will stop and your family and loved ones will get nothing. If you accept the lump sum, you can create an estate that will help your heirs if you’re gone. You may also have a vision in mind for a family business that the $300,000 will fund. There are many variables to consider.

Tax Liability on Lump-Sum Settlements

The Internal Revenue Service views LTD payments and settlements in a fairly straightforward — but sometimes complicated — way. Taxation is easy to compute if either you or your employer paid all the premiums. If the employer paid the premiums as a business tax deduction, then you will owe taxes on any benefits or settlement you receive. If you paid the premiums with after-tax dollars, then the benefits and settlement are not taxable.

Where it can get tricky is when you and the employer shared in paying the premium. In that case, it becomes an exercise in determining the percentages of who paid what. If your employer paid 40%, you will owe 40% of your benefits and settlement to Uncle Sam.

If the premiums were shared, you definitely need to consult with an experienced LTD attorney to help you compute your liability. In addition, you may be able to deduct your out-of-pocket expenses for medical care above any reimbursements, if you're eligible to itemize your deductions.

Call Me at Victor Peña Law PLLC for Help

Whatever stage you are in with the LTD claims process — just filing the claim, appealing a denial, or negotiating a lump-sum settlement — rely on me at Victor Peña Law PLLC to represent you and your rights and negotiate for the best possible settlement. Located in Fort Lauderdale, Florida, my firm handles cases nationwide, including clients located in and around the areas of Los Angeles, Seattle, New York City, and Chicago.