Insurance Policy Buyouts 101: What You Need to Know

If you are on long-term disability, there may come a time when your insurance company will offer you a buyout to give up your policy and stop receiving benefits. This means that you would receive a lump sum amount in exchange for surrendering the policy. The insurance provider would then have no more obligations towards you. In some cases, this may be a perfect situation for a policyholder, but it is not for everyone. If you are in this situation, it is best to consider all the factors before making a decision to accept or decline.

Why Buyouts Are Offered

Insurers offer buyouts for many reasons. Sometimes it is when there is a pending lawsuit, or a lawsuit that is underway but the outcome is still in doubt. They may also offer a buy out to avoid ongoing claim administration when the claimant will likely receive benefits through the duration of the policy. They are calculated based on a number of factors, including the age of the claimant, how likely it is that they will continue to be on the policy, and how much the company has reserved for it.

Buyout Pros

There are several pros to accepting a buyout. For one, usually long term disability policies do not keep giving benefits after you die. With a buyout, some money can be set aside for loved ones. A buyout also means that a claimant would never have to worry that their benefits would suddenly be terminated. Many of our clients, especially in litigation, prefer to be done dealing with the insurance company. They do not want to have to continue to provide updated medical records, be subject to additional interviews and have to bring forms to their doctor for completion.

Buyout Cons

A buyout is not right for everyone. You may feel that the offer is not enough when compared to the benefits you could claim. The insurance company will likely use a discount rate for future benefits, you should know what this rate is before you accept a lump sum payout. You may also worry about your own ability to manage so much money all at once, and prefer to rely on the monthly payments from your disability benefits. There may also be tax implications for a lump sum received in one year. There is also the possibility that you feel you might outlive the amount of money you are offered. Your policy may provide benefits for the rest of your life, in which case you may want to decline the offer. If you are offered a buyout, make sure that you fully understand the process, your policy and rights under said policy, and that you carefully consider the pros and cons before accepting or declining.

If you’re seeking legal counsel to assist you with your buyout, Beedem Law can provide you with the expertise you need throughout the entire process. Reach out online or call 612-305-1300


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