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I am not sure is this the right board for asking my question, but...
My long-term disability insurance is offering me a settlement. They pay me 410.20 per month which will last for the next 16 years, until I am age 65. The offer is for a payment of $15,717.50 this year, and the same amount next year--total. I am figuring that they woud have to pay me $78,758.40 total in the monthly disbursements as mentioned for the next 16 years. But, if I take that lump sum of cash now (which is non-negotiable, take it or leave it, $31,435.50), couldn't I invest that same amount for the next 16 years and make the same if not better over that amount of time?
I would certainly appreciate someone's thoughts on this!
Thank you kindly!
Christa.
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Christa (a.k.a. CVragel) you asked:

<< I am not sure is this the right board for asking my question, but...
My long-term disability insurance is offering me a settlement. They pay me 410.20 per month which will last for the next 16 years, until I am age 65. The offer is for a payment of $15,717.50 this year, and the same amount next year--total. I am figuring that they woud have to pay me $78,758.40 total in the monthly disbursements as mentioned for the next 16 years. But, if I take that lump sum of cash now (which is non-negotiable, take it or leave it, $31,435.50), couldn't I invest that same amount for the next 16 years and make the same if not better over that amount of time?
>>

Their offer sounds like a lousy deal for you. That's because to earn that $410 per month over the next 16 years you'd have to earn an average rate of return of about 14% on that $31.4K. 14% is way too much to expect . . . especially if one is drawing any kind of income out of such an account. When drawing income from an account, one would be wise to expect a conservative rate of return to be sure that the income will be there for that period of time. 6% would be such a conservative number. And if one uses the 6% number along with the $410 per month income over 16 years, that calculates out to about $51,000 net present value instead of $31.4K. So I would argue that a fair lump sum settlement payment would be more on the order of $51K . . . not $31K.

I hope that helps some.
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Thank you for your reply. I appreciate the thought on it. What if I would take the lump sum they are offering me ($31,435.50) and invest it totally--i.e. not relying on any of it for income?
Thanks again for a reply.
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CVragel, you asked:

<< Thank you for your reply. I appreciate the thought on it. What if I would take the lump sum they are offering me ($31,435.50) and invest it totally--i.e. not relying on any of it for income? >>

If you take the lump sum of $31,435 and invest it and don't touch it (not taking any tax issues into account), you'd have about $79,856 at 6% and $144,443 at 10% rate of return at the end of 16 years. If you take the monthly installments of $410 and invest without touching it (again, not taking the tax issues into account), you'd have about $132,305 at 6% or about $194,500 at a 10% rate by the end of the 16 years. So, again, the numbers show that the lump sum offer doesn't look very good.
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I get slightly different numbers using Quicken's Savings Planner.

$410/month, 16 years(192 months), 6% gives $69490.
$410/month, 16 years, 10% gives $101,811.

$31,435 lump sum, 16 years, 6% gives $43,232.
$31,453 lump sum, 16 years, 10% gives $81,643.

Possibly the difference is your interest my be compounded monthly where as I did it annually.

Either way, if you don't need the money to live, you're better off taking the pay out over time. Their lump sum pay out needs to be about $51,234 for there to be no difference. Why else do you think they made that offer? Insurance companies try to work things to their benefit.

JLC
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JLC, you wrote:

<< I get slightly different numbers using Quicken's Savings Planner.

$410/month, 16 years(192 months), 6% gives $69490.
$410/month, 16 years, 10% gives $101,811.

$31,435 lump sum, 16 years, 6% gives $43,232.
$31,453 lump sum, 16 years, 10% gives $81,643.

Possibly the difference is your interest my be compounded monthly where as I did it annually.
>>

Nope . . . that's not it. ;-) Those number are certainly NOT correct . . . . unless there's a tax factor that is being applied some how???? I strongly suspect that Quicken is somehow automatically figuring in a tax factor. That would easily account for such a large difference.


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