Settlement offer...what do you think

[mombottoo]

My dh has been offered a settlement through our private disability insurance company. They offered him 67% of the contract value if he lives to 65 which is when they would quit paying him.

He is considering keeping the payments going month to month. Me, I want us to accept the settlement. In the first place there is no guarantee that he will live to 65 & the monthly payments stop if he dies (God forbid). I feel I am being realistic and of course I can understand his view (nobody likes to face their own immortality). We can invest the money and in the long run end up with more than the contract value. Plus, if something should happen to him the funds would be available to me.

I don't want to be a nag about it, but how can I make him understand that accepting the settlement would be more beneficial to us in the long run....help...

[Greebo]

So its a choice between lump sum once or payments over time?

Give real $ amounts please. And how long till he hits 65?

[mombottoo]

He's 55...amount is close to $50,000, don't have letter in my hand at this moment.

We'd be going from month to month to all at once. We don't depend on the month to month to live month to month. My main concern I guess is that if something happens to him before he turns 65 then the money is gone. I feel it would be to our benefit to have the money in hand, since if they want to they can cut him off, make him go to IMEs and make him sue them if they are so inclined. Which I doubt they would, but you never can tell with insurance companies. If for some reason they ended up folding he would lose his benefit.

For me a bird in the hand, is worth more than 2 in the bush.

[Greebo]

Ok, so $50,000 is 67% of the contract value based on paying him for 10 more years. That means the contract value is $74,626.87. Over 10 years, that's about $622.89 a month, is that about what you're getting?

So your choices are $50k now, or $622.89 a month for UP to 10 years, stopping if he dies.

ASSUME he'll live the 10 years. That means your MOST you'll get from that monthly payment is $74,626.87. IF he dies sooner, you get less. That's the first reason to take the lump sum.

The other reason to consider taking the lump sum is if you can use that 50k and end up with more in 10 years than you would if you took the payment. So you need to know what you'll have in 10 years if you invest the 50k.

That depends on your rate of return.

If you only make a measly 1/2% in a savings account, that 50k in 10 years will only become $52,563.01. Not a good plan.

If you put it in a Jumbo Money Market making 1.3%, in 10 years you'll have $56,937.41. AGAIN, not a good plan.

If you put it into 5 year CDs' back to back, at 2.6%, you're now looking at $64,828.27. STILL not a winner.

In fact, you need an investment with a 4% rate of return to get close - 4% yields $74,541.87. $100 off.

Anybody here with two brain cells should be able to figure out how to get better than 4%, however.

SO - lets look at annuities? How about Nationwide Variable Income Annuity with a Life Income rider. You'll pay about 5k up front, so if you do that and put in 45k, your MINIMUM value in 10 years (if you don't touch it) will be $90,000. About 5.9% rate of return, and the money is GUARANTEED.

NOW - lets introduce risk. Lets look at long term good growth stock mutual funds. Lets use a 10% ROI - be aggressive.

At 10%, your 50k in 10 years will be worth $135,352.07

So with NO RISK you can do 20k better, and with SOME risk you can do 85k better.

Have hubby read this. Then do this:
--> You :smack: Hubby <--
"TAKE THE LUMP SUM!!!"

[stinkbug]

Personally, I wouldn't show him any info that *people on the internet* suggested. It's between you and him and an accountant or adviser. I wouldn't want strangers opinions thrown in my face to try and prove a point.....

Just sayin'....

[mek42]

Maybe you could do your own math and ask here if your numbers come up dramatically different than Greebo's?

[Greebo]

I wasn't aware that mathematics = an opinion.

[marjorie]

I'd also consult a tax person. It might make a big difference...

[itlw8]

would your taxes be higher for the year if you take a lump sum?


and I for one find it helpful to have someone do the math to help me make the decision yes I woluld probably ask the advise of my tax person BUT maany of them are out to make a buck and want you to invest with them so be carefull about that also Greebo has nothing to ggain by shoing the math.

[Greebo]

would your taxes be higher for the year if you take a lump sum?

GOOD question! (And good advice, definitely consult a pro)

I don't know if injury settlements are taxable - but if it is, the 50k increase would probably result in what, 25-28% off the top for Uncle Sam.

But then again - if it's taxable, they're being taxed on it already, so the variable is only the increase in bracket if the 50k boost causes one.

[mombottoo]

Thanks Greebo & everyone else.

The lump sum is the way to go & I will convince him of it...it is taxable, but if we choose to put it into our IRA it won't be. That would tie it up for 4 1/2 years minimum. I am also looking into other investment options, I'd like to get at least 8% so we'll see.

[a.nonymous]

I like the math Greebo. However, you've missed something.

You should compare the performance of lump sum versus the scenario if they invested the monthly payments in the same (or similar) manner.

That'll close the gap, but I suspect not entirely.

[a.nonymous]

As mentioned in my previous post, I would rather compare it to investing the monthly payments in the same vehicles.

I've done the math (yay, procrastination!). Here goes.

Ok, so $50,000 is 67% of the contract value based on paying him for 10 more years. That means the contract value is $74,626.87. Over 10 years, that's about $622.89 a month, is that about what you're getting?

So your choices are $50k now, or $622.89 a month for UP to 10 years, stopping if he dies.

ASSUME he'll live the 10 years. That means your MOST you'll get from that monthly payment is $74,626.87. IF he dies sooner, you get less. That's the first reason to take the lump sum.

I disagree with the bolded part. The company is doing this professionally. So I'll assume that the deal offered is at least equal (if not worse for the taker) to the expected payments given a certain life expectancy - which the insurance company will be able to estimate better than us.

The other reason to consider taking the lump sum is if you can use that 50k and end up with more in 10 years than you would if you took the payment. So you need to know what you'll have in 10 years if you invest the 50k.

That depends on your rate of return.

If you only make a measly 1/2% in a savings account, that 50k in 10 years will only become $52,563.01. Not a good plan.

If you invested the monthly payments with the same percentages, your comparison value would be (assuming he lives for the full 10 years as Greebo is comparing the values with full payouts, too):
$76,630

So, yes. With the 33% handicap out fo the gates for the lump sum, you're in bad shape.

If you put it in a Jumbo Money Market making 1.3%, in 10 years you'll have $56,937.41. AGAIN, not a good plan.

With the same comparison as above, monthly invested at 1.3% would amount to:
$79,777

If you put it into 5 year CDs' back to back, at 2.6%, you're now looking at $64,828.27. STILL not a winner.

Again, same comparison:
$85,259

In fact, you need an investment with a 4% rate of return to get close - 4% yields $74,541.87. $100 off.

Not quite there, yet. With monthly investments @ 4%:
$91,720

NOW - lets introduce risk. Lets look at long term good growth stock mutual funds. Lets use a 10% ROI - be aggressive.

At 10%, your 50k in 10 years will be worth $135,352.07

Again, $622,89 monthly invested @ 10%:
$127,596
Only slightly ahead.

So with NO RISK you can do 20k better, and with SOME risk you can do 85k better.

Have hubby read this. Then do this:
--> You :smack: Hubby <--
"TAKE THE LUMP SUM!!!"

The 33% handicap puts you back quite a bit. And it takes quite a bit of risk to come out ahead.

Now, let's assume that the insurance company made a "fair" deal. Either way, they would expect to pay $50000. That would mean that on average they expect to have to pay 80 monthly payments.

So, for a timeframe of 80 months, the value of investing $50000 directly versus using monthly payments for 80 months (adding up to $50k over time) and invest that at the same rate you'll begin to see some real differences.

1/2%
Lump sum: $52,563
Monthly: $50,660

1.3%
Lump sum: $56,937
Monthly: $52,025

2.6%
Lump sum: $64,828
Monthly: $54,346

4%
Lump sum: $74,542
Monthly: $56,999

10%
Lump sum: $135,352
Monthly: $70,438

Basically, the missing interest of the early stages will bite you in the long run.
The higher your returns are, the more the bite hurts.

Another option I would at least consider is if term life insurance is available and how much that may cost. It's definitely an angle I'd consider. Use (some of) the monthly payments for an insurance over 10 years coverage.
In that case, you could hopefully still invest some of the money while having a premium paid out if your DH should not live that long.
Just something to think about.

[Greebo]

I like the math Greebo. However, you've missed something.

You should compare the performance of lump sum versus the scenario if they invested the monthly payments in the same (or similar) manner.

That'll close the gap, but I suspect not entirely.

You forgot taxes.

[a.nonymous]

You forgot taxes.

Alright, I give up.

BTW, out fo curiosity: How do the taxes work in this case?