What You Should Consider Before Taking a Buyout
Sept. 30, 2021
According to tabulations made by the Social Security Administration (SSA), about one in four of today’s 20-year-olds will miss at least one year of work before reaching the normal retirement age (67) due to a disabling condition.
That projection underscores the need for long-term disability insurance (LTD) coverage. Say you’re 55 and develop a musculoskeletal disorder that prevents you from working. Your LTD policy is meant to provide a steady source of income until you reach retirement age, but insurance companies are in the business of making money. Two years into your monthly payments, they may decide to offer you a lump-sum buyout. Should you take it?
There are many considerations in weighing a buyout offer. Of course, the insurance company is no doubt going to try to lowball you. You may be getting $3,000 a month, which at ten years remaining on your policy totals out to $360,000, but your offer might be for $250,000. You’re clearly getting less.
Is it worth it?
A decision as big as accepting a buyout needs the evaluation of an attorney who is experienced with the insurance companies and their goals and tactics.
The Benefits of a Disability Insurance Buyout
Taking the lump sum enables you to invest it and potentially get a greater return than your monthly payments are providing. Given inflation, in ten years, your $3,000 a month probably won’t buy everything it does today. If you invest wisely, the lump sum may actually provide you a better return.
Also, never trust your insurance company. Even if you’re on a “guaranteed” monthly payment, the insurer will consistently check on your medical condition. At any time, they may decide that you’re no longer as disabled as you once were. They could cancel your payments altogether, and you’ll be left with nothing.
Many policies also contain an “any occupation” clause that kicks in after 24 months. For the first two years, the insurer will pay you because you are unable to work your “own occupation,” but when the “any occupation” clause kicks in, they can force you to seek any type of work that you are able to do.
Another factor to consider when offered a buyout is that your monthly payments cannot be passed along to your heirs. If you pass away before retirement age, your survivors will get nothing. The payments will stop. A wisely invested lump sum can help provide for your loved ones should misfortune strike.
The Downside of Accepting a Buyout
The first thing to remember is that once you sign a settlement, it’s cast in stone. You can’t ask for more or try to get the monthly payments resumed. The insurance company has cut you a check and taken you off their books.
If you struggle with your personal finances, getting a lump sum may not be the best option for you. If you don’t invest it wisely and manage your investment account prudently, you could quickly find yourself in financial straits.
Also, getting a lump sum could have tax implications that might reduce what you thought was a generous offer. A monthly payment of $3,000 might have slight tax liabilities, but getting $300,000 at once could have more significant tax implications. Your tax liabilities will depend largely on who paid for your policy (you, your employer, or both) and whether it was paid with pre-tax or post-tax dollars.
Factors You Should Consider
The insurance company, in making you an offer, is weighing your age, your chance of recovery, and your odds of dying before the policy runs its course. These are what the insurers call morbidity and mortality factors.
The younger you are, the more likely they are to make you an offer that is substantially lower than what you would get if they paid you until retirement. So, when offered a lump sum, you too should take into account your age and your possibility of recovery or early death as much as they do.
The economic outlook is certainly another factor. If, for instance, you had taken a lump sum buyout five years ago and invested some or all of it in Bitcoin, you would’ve made a small fortune, but those types of speculative opportunities are not for everyone and don’t always pan out. However, with inflation on the uptick, an upturn in interest rates is certainly something to anticipate.
Everyone is in a situation unique to them, so a buyout is not always the best option, but you have to ask yourself how much you trust your insurer. An insurance company is always looking for ways to lower or deny claims. That’s why they will continually request medical documentation from you to affirm your disability qualifications. If it looks like you’re on the mend, the insurance company can use that to end your benefits.
You should always negotiate for a higher sum rather than accepting the first offer, but this is not something you ever want to do alone. The insurance representatives are trained to ask questions and request documentation that they can use to their advantage – that is, to cheat you out of money. You’ll want to enlist an experienced disability claims attorney who knows the tricks of the trade and can stand up to the insurance company and its tactics.