If you have a long-term disability, you may want to settle your claim with the insurance company rather than contesting it through a long appeals process and court battle.
A settlement means you accept a lump sum payment in exchange for giving up your right to future benefits. Settling has both pros and cons you need to carefully consider, and you should always weigh the decision with a long-term disability attorney.
The Pros of Settling
While settling your long-term disability claim may seem risky, you should consider several key advantages. Receiving your money upfront, avoiding a lengthy appeal, cutting ties with the insurance company, and never having to worry about disability reviews again can all make settling very appealing.
Let's look at each of these pros in more detail:
Getting Your Money Upfront
A big advantage of settling is getting your money upfront in one lump sum. Having immediate access to a large amount of cash provides financial security and freedom.
You can simultaneously use the lump sum to pay off major debts like mortgages, auto loans, credit cards, and medical bills rather than slowly chipping away at them with limited monthly income.
You can invest the settlement money to generate returns and growth over time. You can also use it for major planned expenses like home renovations, vehicle purchases, education costs, or starting a new business venture.
With a steady stream of monthly payments, saving up enough for large purchases and expenditures can be difficult, leaving you stuck living paycheck-to-paycheck on the limited disability income.
The upfront lump sum provides far more financial flexibility and breathing room. However, have your disability lawyer ensure the settlement will provide for your future financial support.
Avoiding a Lengthy Appeal Process
If the insurance company denies your initial long-term disability claim, you must endure a lengthy, stressful appeals process. There are no guarantees in the appeals process.
Insurance companies will find any possible reason to deny claims and avoid paying out long-term benefits that cut into their profits.
The internal appeals process typically takes six to 12 months at a minimum. It requires overwhelming medical documentation, written appeals, and for you to effectively re-prove your entire disability claim over and over.
If the internal appeals do not succeed, you may need to initiate a federal lawsuit against the insurer, entailing years of litigation and incurring high legal fees and costs. Even after all that, the court may not rule in your favor or overturn the denied claim.
Settling avoids that lengthy, emotionally draining appeal process altogether. It provides you with immediate benefits.
Cutting Ties with the Insurance Company
Another welcome benefit of settlement is permanently cutting any further ties or relationships with the disability insurance company. No more constant surveillance, frequent requests for updated medical records, providing written updates on your condition, or having your activities monitored for any evidence you have improved and no longer need LTD payments.
You won't undergo regular medical evaluations by insurance company-paid doctors who financially benefit from finding you are no longer disabled. No more intimidation tactics or moves by the insurer to build a case to cut off your benefits.
Once you receive that settlement payment, you are free. You no longer have to deal with constant investigation and privacy invasion by the insurance company's claims team. You get closure on your claim and can move on with your life.
No More Disability Reviews
Similarly, accepting a long-term disability settlement means the insurance company can never again schedule any medical disability reviews or reassessments in attempts to terminate your benefit payments. They no longer have any financial liability over your claim.
With a settlement, you eliminate the anxiety and risk of having your benefits cut off or being told you no longer meet the insurer's internal criteria and agenda for disability. Your money is fully guaranteed without any potential disruptions if you manage it properly. You get complete certainty over your disability income moving forward.
Ease of Budgeting and Planning
Receiving a large lump sum settlement makes it much easier to budget, plan for the future, and have certainty over your finances. With recurring payments, you must ensure you don't overspend each month and put yourself in a difficult situation. Unexpected expenses can strain your limited income.
With a settlement, you have full control and transparency over the total amount of money available. You can plan for large investments or purchases years in advance after calculating how to make the lump sum last based on your needs. The money is liquid. It is fully accessible to you, unlike having an insurance company determine your benefits each month.
Funds to Search for Work
While receiving monthly disability payments, any attempts to re-enter the workforce and earn additional income often put your benefit eligibility at risk. The insurance company might determine you are no longer disabled. However, with a disability settlement, you have funds available. You can invest in yourself through education, retraining, skill development, or business or venture.
The settlement was compensation for your inability to perform your prior job, not your projected lifetime of no earnings. Financial resources can empower you to rebuild your ability to earn income again without fearing termination of your disability income.
Inheritance for Heirs
One advantage of receiving a lump sum disability settlement is that your beneficiaries or heirs can potentially inherit any remaining funds from the settlement after your passing.
With recurring monthly benefit payments, those income streams would terminate at your death. But a settled lump sum with a remaining balance transforms into an inheritance asset you can pass down to your chosen heirs based on your will or estate plans.
This allows you to promote generational wealth. You can provide for your loved ones in the future rather than relying on those funds to go to the insurance company.
Eliminates Dealing with Representatives
After accepting a settlement, you no longer have to deal with insurance company representatives, case managers, bureaucracy, or being transferred to different call center agents. You avoid having to re-explain your situation and justify your disability over and over.
Disability representatives, while assisting you, are also incentivized to look for reasons to reduce or terminate your benefits to protect their company's profits. With a settlement, you have a clean break from them and can have peace of mind.
The Cons of Settling
However, settling your claim is not a decision to make lightly. You must weigh significant potential downsides, and your disability attorney can review each one with you before you decide.
Major cons include permanently giving up your future benefits, tax implications, potentially receiving less money overall, losing health insurance coverage, affect on government assistance eligibility, and having no way to reopen your claim later.
Let's examine each of these potential drawbacks more closely:
Giving Up Future Benefits
The biggest downside of settling your long-term disability claim is that you permanently, irreversibly, give up your right to all future disability benefits related to your condition. This is true even if your health unexpectedly declines or your disability worsens over time.
When you accept a lump sum settlement, you relieve the insurance company of any further financial responsibility for your care and lost income related to that disability. You must ensure that the settlement will provide enough money to cover your potential long-term needs, medical costs, loss of income, and basic living expenses for the remainder of your life expectancy.
Miscalculating and underestimating your future needs can leave you in a difficult financial situation. This is why you should never accept anything without advice from a disability lawyer.
Tax Implications
The government may not tax disability benefits paid out over time, but might tax a lump sum settlement. This depends on how the federal and state governments taxed your prior benefits.
If your benefits were taxable monthly, the IRS will also consider a portion of your settlement taxable income. And if your benefits were non-taxed, it may only tax the amount covering lost income.
These taxes can greatly reduce the net value of your settlement. You pay them after you get the settlement. Carefully calculate and plan for these taxes to ensure your settlement lands you the needed amount.
No More Health Insurance
Another major drawback of settling your long-term disability claim is that you permanently lose access to any private health insurance coverage you previously had through your disability policy and employer-sponsored plan.
You will then have to pay expensive premiums for private health insurance from your pocket. You may try to retroactively qualify for government insurance like Medicaid, based on your disability. Otherwise, you will go uninsured and pay 100 percent of medical costs.
Losing affordable health insurance can quickly deplete your settlement funds on medical bills alone.
Medicare/Medicaid Impacts
Getting a big lump sum disability settlement can sometimes disqualify you from receiving need-based assistance through Medicare, Medicaid, or other welfare programs in the future.
These programs have strict income and asset limits. If your settlement puts your total net worth over those thresholds, you may no longer qualify, even if you eventually spend your settlement money on living expenses and medical care. Complex rules govern how settlements impact income versus assets for these program qualification purposes.
Lack of Cost of Living Increases
Taking a one-time lump sum settlement means losing potential cost-of-living increases. These increases often factor into monthly disability benefits.
With periodic insurance payments, those benefit amounts will increase slightly year-over-year based on inflation and rising living costs. However, when settling for a flat lump sum payout, that amount will stay stagnant while expenses like housing, healthcare, and goods continue rising due to inflation.
This erodes the long-term purchasing power and sustainability of your settlement money. Without annual adjusted increases, you must stretch the settlement funds further to keep up with the increasing costs later in life.
Investment and Asset Management Required
Unlike depositing recurring monthly checks from an insurance company, receiving a large lump sum disability settlement makes you fully responsible for managing that amount as assets and investments going forward.
This introduces complexities, risks, investment fees, and the possibility of making poor financial decisions that can deplete or lose portions of your settlement money over time.
Insurance companies have professional asset managers for their funds. However, you must be a savvy investor and money manager or pay financial advisors and firms to manage your settlement. This cuts into the net payout.
Developing an investment strategy and plan to make your lump sum last for life requires experience that many people lack.
Loss of Professional Assistance
Another downside of settling is that you lose access to the assistance and resources that disability insurance companies provide to their active claimants.
This can include help with:
- Coordinating medical care
- Assistance returning to work if possible
- Counseling services
- Social workers
- Rehabilitation programs
These services are free to aid your recovery and maximize your abilities. After settlement, you are on your own to pay out-of-pocket for any similar services and assistance.
Required to Manage Your Own Healthcare
No longer receiving disability benefits also means you do not have the insurance company's staff of medical professionals reviewing your situation, healthcare, treatment plans, and progress.
When on recurring claim benefits, these insurance medical teams help oversee and coordinate an effective healthcare regime for your specific condition and disabilities.
With a lump settlement, that professional healthcare management assistance goes away. This puts the burden entirely on you to navigate your medical care, identify appropriate treatments, avoid gaps in care, and ensure you receive proper rehabilitation.
Always Choose an Experienced Long-Term Disability Lawyer
Because of the permanence of a settlement, always have an experienced long-term disability lawyer review your policy provisions and value your claim. An attorney can negotiate the highest possible settlement amount while explaining all potential ramifications.
If you are considering settling your long-term disability claim, don't go it alone. Contact a qualified ERISA disability attorney today for your free consultation. With legal assistance, you can make the most informed decision to protect your long-term financial future.
J. Price McNamara
Attorney
Losing my own brother, then my father and sister after long, disabling illnesses just a few months apart drove a career change for me. Before that experience, I never truly understood the place you’re in. I never understood the dramatic impact that receiving (or not receiving) the disability and life insurance benefits you paid for and counted on can have on your life especially when you need to focus on family and healing. What I experienced with my own family now drives the way I view my clients and my work, and I will never forget it!
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