When you’re receiving long term disability (LTD) benefits, a lump sum buyout offer from your insurer can be tempting. The idea of a large, immediate payout may seem like financial freedom, but it’s important to take your time and consider this decision fully. Ending the relationship with your insurer may appeal to you but remember, the insurer would not make this offer unless it was in their best interests – it may not be best for you. This blog explores what a lump sum buyout is, why insurers make these offers, the benefits and risks of accepting the offer, and how to evaluate whether it’s right for you.

Understanding Lump Sum Buyouts in Disability Insurance

A lump sum buyout is when your disability insurance company offers you a one-time payment instead of continuing monthly benefits. The amount is typically calculated based on the present value of your future benefits. The insurer will not pay the full value and will apply a discount because the payment is being made up front rather than over the period of several years which is the way these benefits are usually paid.

Insurers make these offers to reduce their long-term financial obligations. For you, it’s a more complex decision: steady, ongoing benefits for as long as you satisfy the definition of disability versus a single lump sum payout now.

Why Do Insurers Offer Buyouts?

• Financial benefit to the insurer: Paying a lump sum now may be cheaper than paying benefits for many years.
• Risk management: Insurers like to eliminate uncertainty. Your long term disability claim could continue for many years. If they pay you now, in a lump sum payment, they change that uncertain risk into a known payment by making a lump sum settlement with you.
• Claim management cost savings: A buyout closes your claim permanently, eliminating ongoing claims management oversight. This means that no claims examiner has to continue to monitor your claim and request information. The claim is over when the lump sum settlement is finalized and the insurance company reduces a substantial cost associated with continuing to assess your entitlement to long term disability benefits.
• Administrative cost savings: Even if the insurance provider is doing very little active claims adjudication, there is a cost savings in ending the obligation to make future payments. Monthly payments need to be monitored and recorded and there will be bank fees for making transfers. There may also be a cost to report the status of the claim to the employer.

Factors to Consider Before Accepting a Lump Sum Buyout

1. Your health status and prognosis: Are you likely to remain disabled for the foreseeable future, or have you recovered in a significant way? If you and your doctor see a return to substantial work to be realistic, a lump sum settlement offers something to you.
2. Financial discipline: Can you manage a large sum responsibly, or is steady income safer?
3. Debt and expenses: Do you need immediate cash to cover pressing obligations? This can be a dangerous way to assess a lump sum buyout offer. LTD benefits are intended to replace a portion of your income when you cannot work. If you pay off debt by taking a portion of the present value of your future monthly benefits, how will you replace that income in years to come?
4. Life expectancy: If your doctor has advised you that you have an illness which will significantly reduce your life expectancy, a lump sum payout may appeal to you. However, if you have a chronic illness and expect to live for many years, future benefits are likely to be more valuable to you.
5. Taxation: Consult a tax professional to understand how a buyout will be treated. Lump sum payouts of future disability benefits are rarely taxable even if the monthly LTD payments are taxable. However, if your disability claim is paid by your employer rather than an insurance company, different rules may apply.
6. Legal advice: Your lump sum settlement offer letter may offer to pay for you to obtain independent legal advice. The offer usually commits to paying for less than two hours of advice. It is important to obtain advice from a lawyer who has experience in disability law. That lawyer must understand whether the insurance company’s present value calculation of your future benefits is accurate but, more important, the lawyer needs to take the time to consider whether a lump sum payout is in your best interests.

Why Get Financial Planning and Legal Advice?

The reasons that a lump sum settlement may appeal to LTD claimants sometimes point to bigger issues which require expert advice.

Debt – “I will get rid of my debt if I take this buyout.”

If you are considering accepting a lump sum settlement in order to pay off debt, it’s important to first consider whether there is a less drastic way to structure your debt load. Consider contacting a licensed insolvency trustee to learn what you can do to manage your debt, including filing a consumer proposal or bankruptcy.

Control and Certainty – “I can’t trust my insurance company not to cut me off.”

Disability benefits should provide a financial safety net to support you when your health prevents you from working. Too often, the road to an approved claim has been a rocky one beginning with a denied disability claim, terminated benefits because you failed to apply for CPP disability, internal appeals and even litigation. It’s understandable that this type of history creates mistrust and anxiety about what will come next in your disability claim.

An experienced disability lawyer can help you determine if you are attaching too much value to ending your LTD claim. Your lawyer can provide you with tips about how to manage the relationship with your claims examiner and ensure that you continue to have access to your future LTD benefits.

Practical Steps Before Deciding

1. Request a detailed calculation of how the insurer arrived at the buyout figure.
2. Consult professionals – get advice from a financial planner and a disability lawyer.
3. Run scenarios – have a financial planner review your circumstances and determine whether a lump sum or monthly stream of benefit payments is best for you.
4. Consider family needs – if the only steady income available to your family is your long term disability income, consider how you will support them if your accept a settlement.
5. Don’t rush. Get all the advice you need. If you need an extension of the time to consider the lump sum buyout, request one.

What Happens If I Say No?

LTD insurers make these settlement offers because they provide the insurance company with a benefit. Unfortunately, they fail to consider the stress and fear such offers cause for many LTD claimants. When clients seek legal advice about these offers, one of the foremost concerns they have is that their disability benefits will be terminated. They also worry about how to make sure their monthly payments continue after they’ve refused the offer.

Will the insurer cut you off?

When a LTD insurance company offers a lump sum buyout in an amount which is close to the present value of future payments, the claim is usually one which is being treated as a long term claim without a significant amount of contact or ongoing adjudication. The fact that the lump sum settlement was offered shows how the insurance company viewed the claim. Long term disability settlements are not offered in cases where it is likely that the claimant will be returning to work or recovering in the near future. It is unlikely the insurer will cut you off after making the offer unless there is solid evidence that you have recovered. These offers are problematic for insurers in future litigation over terminated claims.

Managing Communication with Your LTD Insurer While on Monthly Benefits

If a long term disability claim has been paid well past the two year mark (the definition change date for many policies), most insurance companies will move more the disability claim to their long duration claim team. This means that the requirements to continue to provide information the insurer about your health and treatment is reduced to less frequent updates – sometimes only once per year.

If you decide to continue to receive monthly LTD benefits instead of accepting a lump sum buyout, here are some tips to continue to receive your ongoing benefits.

• Respond promptly and professionally to all insurer requests for information or documentation.
• Keep detailed records of all communications, including dates, names of representatives, and summaries of conversations.
• Be clear and consistent in your statements about your condition and any changes in your circumstances.
• Notify the insurer immediately of any significant changes in your health and treatment.
• Maintain contact by updating the insurer with changes in your contact information.
• Communicate in writing and advise the insurer that you do not wish to have telephone contact if possible
• Seek legal advice if you encounter disputes or feel pressured by the insurer.

Maintaining organized and transparent communication helps ensure your claim continues to be paid and reduces the risk of misunderstandings or wrongful termination of benefits.

Conclusion

A lump sum buyout appears to offer immediate freedom but removes long-term security. The right choice depends on your health, financial situation, and ability to manage risk. Always seek professional advice before signing anything.

If your insurer has offered you a buyout, pause and evaluate carefully. What looks like a windfall today could be a disastrous choice for your financial future. The safest path is to make an informed decision with expert guidance. Contact us for a free consultation with an experienced disability lawyer.