I receive long-term disability benefits from a previous employer’s insurance coverage. The company is now offering a buyout. Should consider this? How will this affect my wife and children who need my low income for financial aid for school? – David
A lump sum payout is worth considering, but it’s a big decision and probably one you should make with the help of a professional or team of professionals. So, our primary advice would be to seek out the help of an attorney, accountant, and/or a Certified Financial Planner™ to help you navigate through some of these considerations:
• Value. If your situation is such that you anticipate being disabled for the foreseeable future, it is fairly easy to calculate the value of your disability income. For example, if you’re 50-years-old and the policy pays $1,000/month until you’re 65; the present value of that stream of income (using a 5 percent discount rate) is about $125,000. If your policy has an inflation adjustment, it’ll be worth more. We use the discount rate because a dollar 10 years from now is worth less than a dollar 10 years from now. So, as part of your calculation, you want to make sure you’re getting fair value.
• Taxes. Any lump sum you receive will be taxable in the year that you receive it. This could bump up your income substantially and put you in a higher tax bracket. So, ultimately you may only end up with 65 percent-75 percent of the payment. That’s where a CPA can help you out.
• Financial Aid. If college-aged kids are in the picture, the lump sum will definitely increase your income and may impact your family’s ability to qualify for financial aid. Additionally, assets are also part of the financial aid equation, so the impact could go beyond just one year.
• Money management. Will you be able to manage the lump sum and utilize it to cover expenses for years to come, or would you be better off with steady income over time? Be honest as you ask yourself – and answer – this very important question.
Our gut feeling is to stick with the monthly disability payment. Our hope is this answer provides you a framework to do some additional research before making this major decision.