Weighing the pros and cons of a lump sum insurance payout

By Tony Poland, LegalMatters Staff • Predicting the future with any certainty is unrealistic so deciding whether to take a lump-sum payout or monthly payments in a long-term disability (LTD) claim takes careful consideration, says Ontario disability insurance lawyer Courtney Mulqueen.

“No one has a crystal ball,” says Mulqueen, principal lawyer of Mulqueen Disability Law. “With a long-term disability, there are no absolutes. Some people are able to recover and return to work while for others, that just does not happen.

“Whether a case is settled at mediation or through negotiations between the lawyers, the insurer normally has a strong preference for paying a lump sum in exchange for the client giving up all future rights under the policy,” she tells LegalMattersCanada.ca. “For the client, it is very much a personal preference. Some are happy to end the relationship with the insurance company in exchange for a lump sum because they do not trust the insurer or dealing with them is much too stressful. I have also had clients who say they just want what they are entitled to, what they believe they are owed, and then to be paid monthly for so long as they remain disabled.”

Fighting for benefits after the denial or termination of a claim comes at a cost, Mulqueen says, adding people are not only dealing with a serious health issue but are off work with no money coming in to pay for treatment.

‘That person will never be made whole again’

She says as soon as an insurance company denies an LTD claim “that person will never be made whole again,” adding some losses are easily quantified but others are not.

“Psychologically, the stress a claim can cause their mental and physical health conditions to worsen,” says Mulqueen. “When a disability claim is denied, a person might even be terminated from their employment and lose their health benefits.

“People may experience setbacks in their condition as well as in their finances. Perhaps they have had to draw on their savings to support themselves. They may be left with less at retirement. I have had clients who were forced to sell belongings,” she adds. “Their condition can become worse and the insurance company does not specifically reimburse them for all of those things in a negotiated settlement.” 

Mulqueen says the insurer may be persuaded to bump up a settlement if a claimant has “some good evidence of damages.”

“However, at the end of the day, it is never enough to compensate for everything they have been through and lost,” she says. “I tell clients that it is highly unlikely they will ever be fully compensated unless they go to trial and win 100 per cent of their claim plus damages,” Mulqueen adds. “But even then, they have lost years of their life and must deal with the stress of litigation. It can be incredibly difficult on people.”

Most cases are settled

While going to court is an option, the overwhelming number of LTD cases are settled at mediation or negotiation, Mulqueen says. 

For the insurer, the advantage of offering a one-time payment is that they are able to close the file and are free from future obligations, she says. And while a large payout may seem ideal for the claimant, Mulqueen says it really does depend on the circumstances.

“Some people are feeling better and want to try to go back to work. They might be optimistic and believe an upfront payment can last a couple of years. If they are careful and use it toward treatment, they anticipate they will get better faster,” she says. “Others might be worried they are going to be disabled until 65 and there is no way a lump sum payout is going to take them to that age.”

Mulqueen says she advises clients to look closely at what the settlement really represents. If someone receives $100,000 it may seem like a good payout, she says, but there are likely to be disbursements for such fees as legal services, medical reports and possibly expert witnesses.

“It can be expensive to prove to the insurance company that you are entitled to benefits,” Mulqueen says. “You have to look at the net amount from the settlement when considering if it makes sense. Can you afford to live off it? How long will it last you? Unfortunately, with a disability, it is difficult to predict how you are going to feel years from now.”

For some, the risk is worth it, she says.

Non-monetary value to never having to deal insurer again

“There is a non-monetary value to never having to deal with the insurance company again, particularly for people who have mental health conditions,” says Mulqueen. “If they no longer have to deal with the insurer, they believe they will start feeling better sooner.

“Sometimes that will be what tips the scales,” she adds. We often call it a ‘divorce’ settlement because the client never has to have anything to do with the insurance company again.”

Mulqueen says one thing people should be aware of is that if they agree to a lump-sum payment, they can no longer make a claim against that insurance company, no matter the circumstance.

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“If you go back to work and get into an accident, you may be restricted from making a disability claim if the employer still has the same insurance provider,” she says. “By taking the lump sum, you are agreeing not to file any future claims for any condition. 

“The insurer’s reasoning is they have paid you benefits that represent something for the future and, theoretically you could go back to work tomorrow and become disabled again, so the lump sum you were paid covers the risk of that.”

Not everyone will get a choice

Mulqueen also warns not everyone will be given a choice and a lump-sum settlement might be all that is on the table in the negotiations.

“An insurance company may simply say they are never ever going to accept the claim unless they are ordered to do so by a judge at trial,” she says. “Whether that position will change over the course of litigation is another story, but sometimes clients aren’t even left with a choice, it’s either take a lump sum or go to trial.”

In the end, it is important to carefully consider your situation and your future needs, says Mulqueen.

“There are times when I will discourage people from taking a lump sum. For example, they may be young and hoping to go back to their employer,” she says. “That payout may look tempting but if they take it and return to work, they will no longer be able to make a disability claim if they become disabled again for any reason in the future. It can be very risky to give up their coverage.

‘Negotiations are a bit tougher’

“Someone with a progressive condition knows that they will never be able to return to work so receiving long-term benefits on a monthly basis makes more sense since it is unlikely that the insurance company will ever be able to cut them off again,” Mulqueen adds. “Unfortunately, those are cases where the insurance company is quite motivated to settle for a lump sum. The negotiations are a bit tougher but I strongly believe my client should not have to surrender their ongoing benefits for a one-time payment when it is clear that the claim should have been approved from the start.”

She says many factors can go into making an informed choice.

“It is up to me to give them all the information to make a good decision. I approach it from the view of, ‘If it was me what would I do?’ There are aspects people often don’t think about because they are so overwhelmed by their situation,” Mulqueen says. “It is my job to present all the possibilities and consequences. I will make suggestions but ultimately the choice is theirs. I just want to ensure that they make the best decision possible at that moment with all the information they have.”