When you suffered a catastrophic injury and could not work, it might have been a struggle to get the long-term disability (LTD) benefits to which you were entitled. Now that your claim is approved, an important decision in the next part of the process is whether you want to payments over time or in one lump sum. The insurance company will do what costs the least money, so if it's offering a lump sum, consider several factors before you accept.
Advantages of a Lump-Sum LTD Payment
The biggest advantage of accepting a lump-sum payment is that it ends your relationship with the carrier. Rather than dealing with the company over a period of months or years as you get monthly payments, you'll receive one payment and be done with the process once and for all.
A lump-sum payment is also helpful if you have substantial and immediate financial needs—such as altering your home to accommodate your disability or paying off a high-interest credit card.
The Downside to a Lump-Sum Payment
An important factor you must consider when thinking about a lump-sum payment for LTD benefits is your own spending habits. If you're not good at budgeting and planning for the future and are likely to spend the money all at once on frivolous things, getting a lump-sum settlement is probably not a good idea.
Also, a lump-sum payment will always amount to less than the total you would get over time. Just how much less is another important consideration.
Finally, you might owe income tax on your LTD benefits, depending on how the insurance premium was paid. If you paid for the policy with after-tax dollars, you wouldn't owe income tax. However, if your employer provided the policy or you paid with pre-tax dollars, you must pay income tax. This could have a negative impact if you accept a large settlement in one payment.
Your ERISA Attorney Can Help You Decide
If you worked with an attorney to get the LTD benefits you deserved, your attorney will help you decide whether a lump sum makes sense for you. As an ERISA attorney, I make sure your rights are protected throughout the entire claim process. If you want to learn more about ERISA and long-term disability policies, request a copy of our free book, How Insurance Companies Sabotage Disability Claims.