A debilitating injury or illness creates profound physical, financial and emotional stress, even when it’s covered under your employer’s long-term disability plan. And chances are good that the insurance company will deny your claim for benefits based on any technicality it can find.
Once claims are approved, some disability carriers will offer a lump sum as an alternative to continuing monthly payments. The proposal may be attractive. But remember that insurers are not doing this in your best interests. Rather, they see it as a way to save money in the long run. Before you decide, it’s crucial to consider several factors. These may include:
You have urgent financial needs
A lump sum payment may be advantageous when it’s part of a larger financial strategy, such as if you have other monthly household income. For instance, a large payout may make sense if you need a significant cash infusion to upgrade your home to accommodate your disability.
Ending the relationship with the insurer
It can be a huge relief to no longer have to deal with an insurance company along with the massive paperwork, re-qualification process and ongoing scrutiny for continued monthly payments. However, bear in mind that agreeing to a payout ends your right to seek any further benefits from the insurer.
Assessing potential tax liability
Income you receive from your employer’s disability plan may need to be reported for to the IRS for tax purposes. Understanding how much the IRS will take from your lump sum payout is crucial before accepting a lump sum.
Seek legal guidance before taking a payout
Lump sum payments may make sense for some but aren’t suitable for everyone. Determining what’s best can be complicated. That’s why it’s advisable to consult with an attorney specializing in long-term disability claims and ERISA law. An experienced lawyer understands insurance company tactics in offering payouts. But they also assess the many other factors determining whether it’s the sensible option for your situation.