BIG LONG TERM DISABILITY INSURANCE SETTLEMENTS
10 Practical Considerations for the Long Term Disability Claimant Considering a Lump Sum Settlement of an Insurance or ERISA Claim
A beloved client who suffered from a serious and debilitating illness finally seemed to get a break. After years of pursuing his claim, including time spent in active and aggressive opposition in a federal court, the defense offered to settle. The insurer agreed to pay the client a lump sum settlement in order to resolve the matter in exchange for a release of further liability. The client was relieved. The battle was ending, and there was financial relief on the way.
As with most settlements, there is a delay between an agreement to resolve a dispute and funds being received. Typically, the lag is a month, perhaps a bit longer. During this time, the client seemed anxious, but patient. He inquired frequently about the status of his check, but he was always patient, courteous, and appreciative. Finally, the big day arrived. The check was in. He let us know he would leave his house and be coming to the office right away. Driving was extremely difficult for him, if not inadvisable, but he was undeterred.
We met in the office, went over the formalities, and he collected a sizable check representing the entire settled value of his claim. We asked if he needed any assistance getting back home, or whether he was sure he could drive himself. He said we had nothing to worry about. He would not be going too far.
The next morning, there were several messages in my voicemail box. They were from a family member of the client, each with increasing urgency and anxiousness. I had a slightly sinking feeling. Before I could call back, the family member called again. He was exasperated. He told me that the client had taken the funds to a newly opened casino in Canada and spent every last penny of his settlement gambling. He revealed the client did not have the $2 dollar toll for the bridge to return to the U.S. Now, the client was calling family and friends to pick him up and bring him back over the border. We never knew the client had a gambling problem.
Three words come to mind: shocking, true, and preventable. While admittedly this is an extreme example, it is instructive for our clients and for us when dealing with large sums of money that come from large disability settlements. Here are ten practical considerations when thinking about whether to take a lump sum:
1. Consideration hiring a legal expert to understand the release agreement.
A lump sum payment in a long term disability case will involve settlement paperwork. Settlement documents fully resolving a disability claim are critically important documents and must be carefully reviewed to ensure that their terms are not overly broad or release other types of benefits not covered by the release. Oftentimes, the settlement documents are prepared as general releases, meaning they extend to claims beyond the specific insurance contract. These documents must be revised in order to ensure that the release is properly limited.
2. Consider the income tax consequences of a large settlement.
Sometimes, a lump sum long term disability settlement will have no adverse income tax consequences. Other times, there are potentially significant income tax consequences. In such cases, there are steps that may be taken to lessen the tax burden. Consult an experienced professional to see exactly which steps may be taken to minimize the income tax implications of a large settlement. There are strict rules that must be followed to insure that a claimant may be able to pay income taxes over time, rather than at the time of the lump sum. Even a large tax liability may be made more manageable with proper settlement drafting and financial planning.
3. Consider the hardship in the claims administration process.
Long term disability insurance companies have contracts or benefit plan provisions requiring a claimant to submit “continuing proof of loss” or “proof of continuing disability.” These “proofs” are likely standardized forms requiring a claimant to set forth the activities of daily living and also forms for completion by attending physicians. One of the advantages of a lump sum settlement of a large long term disability claim is that this process will come to an end.
4. Consider your own financial tendencies and habits.
Prior to being placed on long term disability, consider whether you were a spender, a saver, or somewhere in between. The challenge with a large settlement or a lump sum buyout is that there is a significant amount of money that is easily accessible. Disability claimants who receive buyouts typically do not purchase new cars or homes. Their behavior may change in more subtle, yet expensive ways. For example, if a refrigerator breaks, rather than paying for a service call, a claimant may opt to purchase a brand-new appliance. Over time, these changes in behavior can eat away at the proceeds. The key inquiry is whether a claimant can responsibly handle large funds in a disciplined way.
5. Consider what would happen if somehow you lost it all.
A long term disability claimant receiving a monthly disability income replacement check has likely figured out a way to live off of that sum. A claimant has been living on a fixed income. The monthly disability checks are used to pay housing expenses, clothing, groceries, prescription and physician copays, and the like. With a lump sum settlement, those costs do not cease. Instead, they must be paid from some other source such as the settlement funds, an annuity, divided income, or even some form of new employment. Consider how you would live if the proceeds of the lump sum were used up entirely. How would you pay your bills? Some claimants may be able to answer that they would attempt to work in a very sedentary capacity. Others might not be able to answer the question at all. It is well worth considering.
6. Consider how you will handle the settlement funds when they are received.
Before ever receiving a settlement check, a long term disability claimant should know how the settlement funds will be handled. Will the settlement funds be immediately placed into a structured settlement like an annuity, or will they be invested with an investment firm, or will they simply be placed into a savings account of some type? These considerations should be made well before any large settlement is ever reached.
7. Consider your response to “loan” requests from family members and friends.
A long term disability insurance claimant should be aware that even though they are addressing their own serious health issues and financial challenges, upon learning of a large settlement, others may actually approach the claimant seeking personal loans. This, too, can eat away at a large settlement. A good way to avoid this situation is to tell others that the resolution of the matter cannot be disclosed owing to confidentiality.
8. Consider how your life would be different if the disability claim were resolved.
Long term disability is one of the most stressful events in all of life. It is the intersection of health and finance, and neither is working out well. Adding to the stress are the regular interactions with claims adjusters, insurers, and examiners. One of the great advantages of a settlement is that this process will be removed from your life and you may be better able to focus on the future.
9. Consider your current state of health.
A long term disability claimant should give consideration as to the cause of the disability. If the claimant’s state of health is precarious, and there is a possibility that the full amount of benefits may not be collected, this should be given due consideration. Conversely, if the disability claimant’s condition is chronic, but unlikely to be life-threatening, the issue of how many years of disability remain is an important consideration. A lump sum settlement may not be in the claimant’s best interests.
10. Consider how the funds will be invested.
A claimant should give proper consideration to how a large settlement will be invested and by whom. A claimant’s receipt of a substantial sum of money tends to be followed by offers from financial advisors. A large settlement must last for several years, if not decades. A large settlement can appear much smaller when the number of years it covers is actually considered. Proper financial planning is key to having a successful resolution of a long term disability claim on a lump sum basis.