You have been receiving $4,000 a month in long-term disability benefits for several years. Then a letter arrives: the insurance company will pay you $200,000 to settle your claim. No more medical records, questionnaires, or worrying about the next review.
That is a lot of money. Should you take it? Before you agree, you need to understand what you are giving up and whether the offer is a fair price for it.
What a buyout is
A buyout, or lump-sum settlement, is an agreement in which the insurer pays you once in exchange for ending its obligation to pay future benefits.
Example: you are 55, receive $4,000 a month, and your policy pays until 65 if you remain disabled. Ten more years of payments would total $4,000 × 12 × 10 = $480,000. If you accept $200,000, you get that money now and give up the monthly payments. If your condition later gets worse, you ordinarily cannot go back and ask the insurer to start paying again.
Why the insurer is offering
A buyout reduces the insurer’s future obligations and closes the file. It does not expect to pay the full $480,000. It may be counting on:
- your condition improving,
- your return to work,
- offsets from other income,
- a future review that ends your benefits, or
- your not living to the end of the benefit period.
It also factors in the time value of money: $200,000 today is not the same as $480,000 spread over ten years. The insurer evaluates the buyout from its financial perspective. You need to evaluate it from yours.
What your claim is really worth
Value is not just your monthly benefit times the months left. It depends on:
- Your age and how many years remain until the benefit period ends.
- Your monthly benefit, after offsets such as Social Security disability or workers’ compensation.
- Your medical condition. A severe, progressive condition unlikely to improve supports a higher value.
- Your policy’s benefit period: age 65, Social Security retirement age, or something else.
- The risk of termination at a future review.
A careful valuation calculates the present value of the benefits you can expect. In our example, 120 monthly payments of $4,000, discounted at a hypothetical 5% a year, have a present value of about $377,000. That figure assumes every payment is made. It does not account for termination, death, offsets, or other risks. So the real question is whether $200,000 fairly compensates you for a stream of benefits worth roughly $377,000 under those assumptions, adjusted for the risks in your particular case.
Reasons you might accept
- You want the reviews to end. Records requests, questionnaires, exams, and surveillance can be exhausting. A buyout generally ends ongoing reviews under the settled claim. For some people, that peace of mind is worth taking less.
- You have an immediate financial need: debt built up while you waited for approval, a mortgage, or modifications to your home. But consider whether solving today’s problem leaves you without income later.
- You expect to return to work. A buyout can provide security during the transition. Read the agreement carefully; do not assume it allows unrestricted future work without consequences.
- You have other support, such as Social Security disability, retirement savings, or a spouse’s income.
- You worry your benefits will be terminated, for example because the any-occupation switch is coming or your records contain problems. A reasonable buyout can trade uncertainty for certainty. That is not a reason to accept a low offer. Evaluate the strength of your claim first.
Reasons you might reject
- Your condition is permanent and well documented, which makes your future benefits more valuable.
- You have many years of benefits left. A younger claimant may be giving up hundreds of thousands of dollars.
- You depend on the monthly income. Managing a large sum takes discipline when you cannot replace it by working.
- The offer is too low. An insurer’s first offer is not necessarily its best.
- You would lose valuable extras, such as cost-of-living adjustments, survivor benefits, or links to continued health insurance, life insurance, or waiver-of-premium benefits. Find out before you sign.
Taxes
The tax treatment of LTD benefits generally depends on who paid the premiums and how:
- If your employer paid the premiums and they were not included in your taxable income, the benefits are generally taxable.
- If you paid the premiums entirely with after-tax dollars, the benefits are generally not taxable.
- If premiums were split, part of the benefits may be taxable.
A lump sum can be more complicated, and a large taxable payment in one year can create a large tax bill. Do not assume a buyout is tax-free. Talk to a qualified tax professional before you accept.
Social Security and other benefits
Most LTD policies reduce your check by your Social Security disability benefit. If your LTD benefit is $4,000 and you receive $2,000 from Social Security, the insurer may pay only $2,000, and any buyout should be calculated on what the insurer actually expects to pay. A buyout does not ordinarily end your SSDI. But a large lump sum may affect needs-based programs such as SSI or Medicaid, and the settlement should resolve any SSDI overpayment the insurer claims you owe.
Can you negotiate?
Often, yes. Before responding, find out how the insurer reached its number. What did it assume about your life expectancy? What discount rate did it use? Did it assume you would improve? Did it account for Social Security offsets? How likely did it think a future termination was? A lawyer experienced in LTD settlements can challenge those assumptions. There is no guarantee the insurer will raise its offer or settle at all.
Before you sign
- Get the complete policy and identify the benefit period, payment provisions, offsets, and any other benefits you would lose.
- Calculate the total remaining benefits and their present value.
- Evaluate how strong your continuing claim is: your condition, your prognosis, and the risk of termination.
- Get tax advice.
- Read the settlement agreement and understand exactly which rights you are releasing.
- Have an attorney experienced in LTD claims review the offer and negotiate for you.
The bottom line
The insurer is not giving you money. It is buying your right to future benefits. For some people, a buyout brings security, ends the reviews, and opens doors. For others, a discounted lump sum means giving up income they will need for years. Before you accept, make sure you understand the value of what you are receiving and the value of what you are giving up.
Received a buyout offer? Call 770-351-0801 or request a free case evaluation before you respond. We explain our fee terms for settlements at the free consultation.
Related: Why your approved claim is being reviewed · Why your insurer makes you file for SSDI · The overpayment demand