LTD Structured Settlements

What is LTD Insurance?

LTD or long-term disability insurance is an insurance policy that protects an employee from loss of income in the event that he or she is unable to work due to illness, injury, or accident for a long period of time. The ability to earn an income is a valuable asset and many people choose to protect it though disability insurance.  It can be paid for by an employer, partially paid for by the employee or an individual can purchase individual disability insurance coverage from and insurance company.

How Are LTD Benefits Taxed?

IRC §104(a)(3) provides a tax exclusion for amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer). Simply said, individually paid LTD benefit payments are tax exempt while Employer paid LTD benefit payments are taxable.

LTD Lump Sum Settlement Offers Should Be Reviewed Carefully

 

• Your employer or its group LTD insurer may offer a lump sum disability settlement. What this means is that you are being offered the present value of all or a portion of your future monthly disability benefits. 
• This calculation provides the employer or insurance company with a discount for paying you a lump sum settlement today, as opposed to paying out monthly benefits over the course of time.
• The discount rate used in calculating the present value offer may not take into account taxes and the higher tax bracket you may be pushed in with the proposed lump sum disability settlement.
• A lump sum settlement on an employer-paid Group LTD plan is also fully taxable. 
• It’s important to take into account that the discounted lump sum you are being offered, is further discounted by taxes and applicable attorney fees. For some people such a settlement could expose them to the Alternative Minimum Tax (AMT). 

 

An LTD Structured Settlement is one way to help mitigate this problem .

Group LTD Structured Settlement Using a Non-Qualified Assignment

We offer solutions for both insured and sell-insureds utilizing a non-qualified assignment for all structured long-term disability settlements.

 

• Allows the Group LTD insurer/employer to be fully released from the future periodic payment obligation
• Provides the claimant with a customized stable income stream.
• The periodic payments are funded through the purchase of an annuity from Metropolitan Tower Life Insurance Company (AM Best rated A+). A Metropolitan Tower Life Insurance Company guarantee backs up the assignment company, which is a domestic Delaware domiciled company
  
• Metropolitan Tower Life Insurance Company is able to accommodate scenarios where the insurance is fully or partially employee paid. If a claimant is to receive both taxable and non-taxable payments, two contracts will be issued, one for each type. Payments must begin in 13 months with the Metropolitan Tower Life option.
  
• We also offer other non-qualified assignment solutions through various offshore non-qualified assignment companies, including LTD settlement payments funded with annuities issued by Independent Life Insurance Company, a Texas domiciled life insurance company, United States Treasury obligations, fixed obligations, as well as a reinsurance effective for very long-term cash flows where LTD obligations are currently being paid by an insurer.
  

 

Benefits of Structured Settlements on LTD Claims

For both taxable and nontaxable disability settlements, structured long-term disability settlements:

 

• may assist both claimant and insurer in successfully bringing resolution to a claim.
• customized payout. Payment can be made monthly, annual, immediate, deferred, fixed cost of living adjustments and lifetime income streams.

 

For taxable disability settlements, structuring long-term disability settlements:

 

• an opportunity to receive income in a more tax-efficient manner.
• greater overall payout than would otherwise be achieved with a single, lump sum settlement
• avoidance of escalation into higher tax brackets
• preservation of deductions that may be lost at higher income levels
• avoidance of the alternative minimum tax (AMT)

 

Dealing with Tax Reporting When an Employer Paid LTD Settlement is Structured

 

• Per IRC §3504 , an insurer or third party can execute an agent agreement with each employer or disability carrier which enters into settlement agreements funded by annuities via Form 2678 .
• Allow for turnaround time with the IRS, if there is no Form 2678 in place.
  
• If such a program is available, in accordance with IRC Section 3504, the insurer or third party will complete a quarterly filing of Form 941 and Schedule R, to report wages paid.
• If such a program is available, the insurer or third party will issue a Form W-2 annually in connection with the payments to the claimant.

 

Last updated May 11, 2024