What is a disability insurance buyout?
A buyout is a one-time, lump sum payment that a disability insurance company makes to a person in lieu of the insurance company paying ongoing monthly disability benefits. The lump sum is typically a single payout but can sometimes be disbursed in several installments. It can be offered at any stage of the claim but is usually a viable option only after being on claim for years. A buyout can be offer many benefits but must be given careful consideration before the decision is made to settle.
An insurance company will “buy-out” an insurance policy in exchange for a complete surrender of your disability policy. This means that you will not have continued insurance coverage. Depending on where you obtained the policy, a buyout can also affect your eligibility for continued coverage on other employer-sponsored benefits including: health coverage, dental coverage, life insurance, pension, etc.
Buyouts can also come with significant tax implications that should be taken into consideration before signing any settlement release. A claimant could seek a buyout to avoid having to deal with ongoing claim reviews and dealing with the insurance company. An insurance company has an incentive to buyout the policy to free up resources.
Should I accept a buyout from my insurance company?
There are many factors that anyone considering a buyout should weigh before reaching a decision.
First, there are personal circumstances like your age, health, finances and family situation. It is also essential to keep in mind whether you are currently receiving or may in the future be eligible to receive Social Security Disability Insurance (SSDI) benefits, which is a separate program operated by the federal government.
Then, there are factors related to your specific disability insurance policy and your relationship with the insurance company. It is crucial to consider how much time you have left on your policy and whether there are any upcoming changes in your policy that might make it more difficult to continue receiving your monthly benefits in the future.
An experienced disability insurance buyout attorney can help you understand the pros and cons of accepting a buyout. A seasoned attorney can also help you evaluate a buyout offer and negotiate a lump sum payment on the best possible terms for you and your family.
How is a Long Term Disability (LTD) Buyout offer calculated?
Every insurance company has its own unique method for calculating buyout offers. But their formulas all include the same basic factors, including:
Your age and life expectancy. The longer you are expected to live after becoming eligible for benefits, depending on age and medical conditions, the higher the buyout offer you are likely to receive. The longer you live, the more likely the insurance company would be expecting to pay you to the expiration of the policy. If you have a lifetime rider on an individual disability policy, a buyout offer should be given very careful consideration since the insurance company’s future liability is much more difficult to calculate.
The number of years remaining on your policy. Disability insurance policies are often capped, with a limit on how long the company has to pay out monthly benefits. Most group policies will pay to age 65 or your normal retirement age. The more time remaining on the policy, the higher the value should be. However, the longer the time remaining, the more uncertainties there are and the lower the buyout offer may be.
The likelihood that you will remain disabled. Generally, the insurance company pays benefits only for the time that you are disabled or unable to work. The more likely you are to remain disabled, the higher the settlement offer should be.
Cost of Living Adjustments (COLA): Some disability insurance policies include periodic increases based on changes in the general cost of living.
These and other factors are used to determine the policy’s “present value.” This is the amount you would have to invest right now at a specific interest rate to get the same payout that you would otherwise get at the end of your policy term. A buyout offer will be even further reduced by the insurance company when making a settlement offer.
What is present value?
The present-day value is the current worth of a future sum of money or a stream of cash flow given a specified rate of return. Insurance companies and others in the financial industry, including lawyers, often refer to present value as the “discounted value.” The calculation of discounted or present value is extremely important in many financial calculations including buyout offers from your insurance company.
In making a buyout offer, your insurance company will take a discount for providing you with a lump sum payout today rather than paying out monthly benefits over the course of time. It is discounted because that same lump sum of money would be worth less due to inflation. Also, having access to a lump sum of money today could give you the opportunity to invest the money and yield interest. By paying you the money now, the insurance company will lose the ability to earn interest on it. Accounting for these variables is how present value is calculated.
The discount rate varies but in today’s financial climate, an interest rate between 3% and 5% is generally considered reasonable.
What is the mortality rating?
When evaluating a claim for a possible buyout settlement offer, the insurance company will do a medical review and evaluate your life expectancy. Most long-term disability policies will pay benefits until age 65 or Social Security Normal Retirement Age.
The mortality rating will depend on your age and medical conditions and the likelihood you will not survive for the entire period payable under your disability policy. Actuaries will calculate the chance that you may die before your policy expires.
What happens if I do not accept the LTD buyout offer?
The decision of whether to accept or reject a buyout is ultimately up to you. If you reject an offer, your insurance company must continue to pay you the monthly benefit owed under the terms and conditions of your policy. It is crucial to fully understand these terms and conditions before deciding on an offer. Depending on the insurance company, you may have less time left than you might expect.
Companies such as Cigna and Sun Life are notorious for extending offers to their claimants in the months leading up to major changes in the disability policy that will subject the claimant to increased scrutiny ultimately leading to a denial of benefits. With these two companies, the denials come after a buyout offer is rejected. Some buyout offers come tied to threat that benefits will be denied if the buyout offer is not accepted.
In this situation, you should contact a disability buyout attorney immediately after receiving an offer, whether written or verbal.
Will my lump sum disability buyout be taxed?
Whether your long term disability benefits are in a lump sum or you receive monthly payments, if these are taxed depends on many factors.
The general rule is that if the premium was paid with after-tax dollars, then the benefits are not taxable. However, if the premium was paid by your employer or with pre-tax dollars, then the benefits are generally taxable based on regular income tax rates.
The tax implications that come along with a lump sum payout are significant and should be carefully considered. We strongly urge you to consult with experienced attorneys as well as a tax/financial professional regarding tax issues associated with a settlement. Victor Peña Law PLLC has a growing network of professionals to assist with determining your best options and offering solutions to your tax issues.
Will a buyout affect my Social Security Disability (SSDI) benefits?
The SSDI system is entirely separate from your private disability insurance claim with your insurance company. The Federal Government operates the system through the Social Social Security Administration (SSA).
If you are seeking SSDI benefits, you have to apply for them by filing a claim with the SSA and proving that you are “disabled” as defined by the federal law under the SSDI system. This analysis focuses mostly on whether you can perform what the government calls “substantial gainful activity.”
Your eligibility for benefits under each program–SSDI or private disability insurance– depends on the terms and conditions that specific program or policy.
That being said, your decision to accept a lump sum payout will not affect your SSDI benefits. Instead, you will continue to receive your monthly SSDI benefits as long as you are deemed disabled under the SSA’s standards. You should consult with an SSDI attorney for specific questions relating to SSDI benefits.
Before accepting a buyout, however, you should consult an experienced disability insurance buyout attorney. In some situations, a disability carrier may want some, if not all, of your SSDI retroactive payout. Whether they can do this will depend on a number of factors including your policy, any reimbursement agreement signed, and if your insurance company is willing to offer a buyout. An experienced buyout lawyer can review the terms of the policy and any buyout offer to determine if being approved for SSDI after taking the settlement may impact you.
What are the benefits of taking disability buyout offer?
Generally, if you decide to accept a buyout on your disability insurance claim, it’s to help improve your financial situation and plan for the future. A lump sum payment offers many financial advantages that a monthly cash payment does not. These benefits include:
A long-term disability policy comes with a lot of uncertainty. A policy will not come with rights of survivorship, which means the payments stop when you die. Although some disability policies do pay a survivor benefit when the policyholder passes away, that benefit is usually short-lived. It commonly lasts around three months.
Eliminating the risk of denial. Receiving a lump sum payment means that you never have to haggle with your insurance company again. You don’t have to worry about changes to the terms and conditions that could be used to stop or reduce payments, and you don’t have to continue to prove to the company that you are still eligible under the policy. Additionally, you also don’t have to be concerned about whether the company has sufficient cash to continue paying your monthly benefits.
Future planning. The cash that you receive now can be used to prepare for the future through investments and estate planning.
Resolve debts. Money received now can be used to pay off your debts, rather than turning to high-interest loans and credit cards.
Work if you want. If your condition improves after taking a buyout, you can try going back to work without worrying that it will cost you your monthly benefits.
What are the disadvantages of taking a disability buyout?
The decision to accept a buyout is not always advantageous. It should be given serious thought—with the help of a disability insurance buyout attorney—before simply taking the first offer the company makes.
Monthly bills. You should consider how eliminating monthly payments will impact your ability to meet monthly obligations, like housing, food, transportation, healthcare and other recurring costs.
Tax consequences. If the payment is taxable, it could cost you. A lump-sum payment may bump you into a higher tax bracket than you would be in if you continue to receive benefits every month.
Personal responsibility. You should consider whether you trust yourself to manage a large lump sum payment in a way that is responsible. If you have trouble managing finances, it may be dangerous to take a large payout without a specific plan about where you will use and protect the cash.
Low-ball offers. There is always a risk that the insurance company is offering a buyout significantly less than what the benefits would be worth if you continue to take them monthly. That is why it is crucial to consult a disability insurance buyout attorney before making a decision.
Is my disability insurance company required to offer a lump sum buyout?
No. There is nothing in the law or an insurance policy that requires the insurance company to offer you a buyout.
There are several reasons, however, why a company may offer a buyout, including that the company thinks they can get away with paying less money now than they would have otherwise by continuing to pay monthly installments.
A seasoned disability insurance buyout lawyer can help you understand the motives behind a buyout offer and weigh the pros and cons of whether to accept the deal.
My disability company is demanding reimbursement from my SSDI award. What can I do?
If your disability company demands reimbursement, contact an experienced disability insurance buyout attorney. Although Social Security Disability Insurance (SSDI) benefits and long-term disability benefits through private insurance companies are two different programs, the interplay between the two can raise some complicated legal issues.
In some cases, an insurance company may try to write into the policy or settlement agreement some offset related to any SSDI benefits you later receive. Although the company can’t garnish your Social Security disability checks, it can try to recover that money in court.
How we can help with a long term disability buyout?
Deciding whether to accept a disability insurance benefits buyout can have life-changing consequences for you and your family. That is why it is vital that you seek the advice and counsel of an experienced disability insurance buyout attorney.
Victor Peña Law PLLC will help you fully understand the benefits and drawbacks of accepting a long-term disability insurance settlement. We take the time to consider your unique personal situation, weigh the pros and cons of a buyout and determine whether the insurance company has offered you a lump sum that is fair and makes sense to take under your specific circumstances.
Victor Peña Law PLLC also understands the stress that comes with dealing with insurance companies, which is why we negotiate directly with insurers on your behalf. Attorney Victor Peña's track record of success in these cases speaks for itself.