The Advantages and Disadvantages of Taking a Lump Sum Settlement Versus Monthly Payments for Your Long Term Disability Case
Sometimes insurance companies will offer what is called a lump sum settlement. A lump sum settlement means that instead of receiving monthly payments, you will be given a one-time payment equal to the number of months they planned to pay in one check; This might sound like a great idea- you get a large check, and the insurance company doesn’t have to worry with monthly payments. But a lump sum settlement comes with advantages and disadvantages.
If an insurance company offers you a lump sum settlement, you should decide whether or not to settle very carefully. The insurance company will be estimating what your disability is worth from the company point of view. There is a chance they could undervalue your claim.
Here are some factors to consider when trying to determine what your claim is worth:
The Present Value of Your Benefit Claim
When the insurance company prepares your benefit settlement, they will do so with the present day value; This means that all future claims will be valued at the present day as well and not be measured at the future value. In essence, the insurance company is giving itself a discount for paying you a lump sum because they will be losing future interest earned when paying monthly. However, you will have the opportunity to invest your money if you wish and earn interest for yourself.
Interest rate calculations at the time of your benefit settlement are very important. Interest rates are used to determine how much you could potentially earn if you choose to invest part of your settlement. Interest rates are always fluctuating but between 3 and 5% is a good rate average.
Cost of Living
Along the same lines are present-day value, you have the cost of living. The cost of living is the estimated amount of money you would need to make to afford housing, food, utilities, taxes, and healthcare. The Bureau of Labor Statistics provides data to the Social Security Administration that helps them determine the Cost of Living. Cost of Living is divided up by major cities across the country. Check your policy to see if you have a cost of living clause. If you do, this means your payment will increase each year the cost of living goes up in your area. This will need to be considered when determining a lump sum settlement amount.
Considering your life expectancy rate will be another factor in determining your long-term disability benefit. A standard LTD policy will pay out until retirement age unless otherwise noted. This age could be between 62 and 65 years old. If you are close to retirement age when you become disabled, the insurance company may try to exploit this fact and only pay you for 2-5 years in your lump sum settlement. Just be aware of this when negotiating.
Tax payments are another factor to consider. If you receive a lump sum settlement, it could put you in a higher tax bracket for that year. The amount of taxes you will pay is based on the insurance policy you have. Most group policies are “pre-taxed” thus leaving the burden to pay taxes on the insured. Individual policies, however, are usually taxed upfront making the policy payout tax-free. Taxes is one more thing to consider before agreeing to a lump sum settlement.
Ending Your Relationship With the Insurance Company
Another benefit of accepting a lump sum settlement is you will no longer have to haggle with the insurance company. You won’t have to worry about being put under surveillance, having a lapse in benefit payments, or fighting for the rest of the money you are owed.
There are many advantages and disadvantages to receiving a lump sum settlement. The insurance company may want you to make a quick decision, but take some time to review all your options first. A lump sum settlement will be a final agreement between you and the insurance company. Making sure that the lump sum settlement will meet your needs throughout your life is the most important thing to remember when negotiating.
Although based in Florida, the Ortiz Law Firm represents claimants across the United States.
If you’d like to speak to one of our Pensacola Long-Term Disability Insurance Attorneys about your denied claim, contact us at (888) 321-8131 to schedule a consultation. We can help you evaluate your claim to determine if you will be able to access Long-Term Disability Benefits and how to move forward with the process.