We are now within weeks before the end of the 3rd Qtr. profitability close and Unum is reaching out to insureds offering lump sum settlements sometimes with 6 figures if the benefit is high enough. Apparently, Unum is testing the waters to rid their financial reserves since most people today need money and are willing to sacrifice to obtain it.
Disability claim settlements aren’t just about the money for most people; they are life decisions where all circumstances must be taken into account. While it is true that most people need money today, it is also true that we live in a world of risk and insureds should always use common sense to judge the consequences of their actions.
I’m sure most people would agree that it would be foolish to pay for a stick of gum with a credit card, or liquidate long-term assets to pay off short-term debt. Disability claims are all about RISK, although most people don’t, or refuse to think about benefits in that way.
The Unum settlements I’ve seen thus far are offering approximately 67% of net present value with a discount rate of 4.667%. If you are unfamiliar with these terms please send me an email and I will give you the settlements book I wrote for a small donation from my website.
In theory, insureds should be able to take their lump sum settlement and invest it at 4.667% to yield future value.The problem is that due to inflation, investment opportunities earning over 1% are impossible to find. You won’t be able to do it, and from the beginning you already have a substantial loss of opportunity to earn future value.
Secondly, 67% of present value is lower than the usual 70%-72% Unum was offering just prior to the increasing inflationary economy. Although some insureds have considered Annuities as safe investments, annuities also depend quite heavily on portfolio investments, which are more at risk now than ever before. My concern is that given the risk of both economic downturns and lack of investment opportunities, most insureds will not be able to live on the lump sums being offered.
And finally, there are the taxes. No insured should consider Unum’s lump sum settlements without considering the tax consequences of a lump sum. Benefits and settlements are taxable to the extent that employers pay the premium. If the employer paid the premium, the settlement is 100% taxable; if you paid the premium it is excluded and no tax is payable. Unum’s settlement offer letter usually has a disclaimer that the company is NOT responsible for taxes, and they aren’t. They make that perfectly clear.
Tax consequences of a settlement can be significant and decrease the purchasing power of cash available to pay monthly expenses. One settlement Unum offered included the offer of receiving the lump sum in partial amounts in future years in order to lessen the tax hardship. Unum engaged an independent firm to manage these payments, but I still don’t think it would be a good idea to rush into a settlement all things being equal.
Again, disability claim settlement lump sums are “life” decisions, not monetary ones and all significant factors should be considered. It would be unwise to allow Unum to take advantage of the fact that you may need money. Think carefully, and act wisely.
