Wow, we’ve only been answering questions here for a little more than a month and this is the second question on this topic. It’s an important question that should not be taken lightly. Here’s an excerpt from how we responded the first time around and upon further review, it still looks like very good advice:
“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 per 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 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 to 75 percent of the payment. That’s where a tax pro, such as a CPA can help you out.
• 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.