Long term disability insurance provides the needed safety net to protect against disabling injury or illness. Some insurance companies offer a provision called a "lump sum buyout" which may be beneficial to the policy holder.
A lump sum buyout is the payment of funds in exchange for the surrender of one's long term disability policy. As a way to save money, insurance carriers calculate these buyouts based on the amount they project they will have to pay a claimant in the future, but at an overall reduced rate.
Each insurance company has their own methodology in determining the buyout amounts, however, there is a general principle that most insurance companies follow: if the lump sum buyout amount is less than the expected monthly payments, insurers will try to negotiate a buyout.
Lump sum buyouts are always at a discounted rate, which seems like it would be in an insurer's interest to continue to collect benefits instead of a lump sum payment. However, this is often not the case.
Let's examine the potential benefits of a lump sum buyout below:
- Lump sum buyouts provide extra security for a claimant's family. Long term disability insurance policies contain no rights of survivorship that are commonly present in life insurance policies. To obtain a lump sum buyout, there is additional financial security in case of an emergency.
- While receiving long term disability benefits, there's always a risk that benefits will be denied or cut off. With a lump sum buy out, there is a freedom to live without the constant fear of a denial.
- The cash received in the lump sum buyout is often tax-free and free to use and further invest.
- A claimant can return to work without hurting a claim or subject to the scrutiny of insurance companies.
It is essential to consult an attorney when planning a lump sum buyout. These are complicated processes which require the expertise of an attorney to negotiate the best possible lump sum settlement.
About the author: Gregory Michael Dell is an attorney and managing partner of the disability income division of Attorneys Dell & Schaefer. Mr. Dell and his team of lawyers have assisted thousands of long-term disability claimants with their claims against every major disability insurance company. To request a free legal consultation call 800-411-9085.