How Is a Long-Term Disability
May 13, 2022
Due to a physical or mental condition that prevents you from working, you’re receiving monthly benefits from a long-term disability (LTD) policy you purchased at work or on your own. At some point, the disability insurance company may offer you a buyout so they can reduce their liability for payments in the future and free up resources. Alternately, you may tire of dealing with the constant requests from the insurance company to recertify your medical condition and wonder if there is a way to settle your claim.
If the insurer offers to buy out your remaining benefits, you can rest assured that the offer will be significantly lower than what’s owed you. Insurance companies are, after all, in the business to make money, and if they can reduce future liabilities, they can shore up the bottom line.
If you are offered a buyout, it is prudent to consult with an LTD buyout attorney immediately to evaluate the offer. The same holds true if you desire to seek a buyout on your own. There is a formula that the insurers use in calculating any buyout, and understanding the formula in advance can put you in an advantageous position. Approaching the insurance company on your own without a plan could cost you all of your future benefits if you ask at the wrong time or in the wrong way.
Does Your Disability Insurer Offer Buyouts?
In almost every case, a long-term disability policy will not contain a buyout clause, so you can never know exactly if your insurer is willing to negotiate or offer a buyout. But, insurance is a well-developed business and the industry is well versed in making money. Insurance companies will often review the claims on their books to see if they can moderate their liabilities.
In the process, they may decide that it’s better just to terminate your claim because of “new information” they’ve discovered, whether through repeated medical exams or even surveillance. That Facebook post of your vacation to Cancun can come back to haunt you with a cancellation of your benefits.
If they don’t terminate you, they may decide to offer you a voluntary buyout. If they do, they will use a specific formula, though the variables involved can be tweaked according to each insurer’s standards. If a buyout is initiated, they will also rely on this formula. However, sometimes the discounts applied are much larger depending on whether the insurance company initiates the buyout or the claimant.
How an LTD Buyout Is Calculated
Disability insurers, in calculating a buyout offer amount, will start with calculating the present value of your anticipated future benefits. A buyout is an option only if your disability is expected to continue for the maximum duration of the policy. This is usually to age 65 or your normal retirement age. If you spent the money on a policy with a lifetime rider, then they use an actuarial table to determine how long you will live based on various risk factors and ratings.
After calculating the present value of your future benefits, additional discounts will be applied for mortality and morbidity ratings. Essentially, the carrier is calculating your life expectancy based on your medical history and reducing the expectancy to a percentage which they will use to reduce the present value even more. Lastly, the carrier will account for other uncertainties based on its own claim history of all claims in its risk management pool. If the mortality rating is too high, they will not make an offer and instead decide to take the risk that you may not make it all the way until the expiration of the policy.
Remember that LTD insurers are under no legal obligation to provide a lump-sum buyout, so they can tweak the numbers to their benefit should they decide to offer one. It is always a good idea to speak with an experienced LTD disability attorney to help you understand the process and even handle the entire process for you. Never jump at the first offer without consulting an attorney.
Pros and Cons of a Buyout
A lump-sum payout can seem attractive. You can invest it in stocks, bonds, real estate, or other interest-bearing vehicles. You can start a family business on your own, pay off debts, or even set up a family trust to care for your family. Many LTD policies do not provide survivor benefits and those that do pay only a minimal benefit. So if you die prematurely, the benefits will stop and your family will be left without that resource. Taking a buyout can help provide a cushion for your loved ones.
If you have lifetime benefits, and you’re only 45 or 50 years old, a buyout might not be advisable if you are expected to live to 85 or 90. Of course, you also never know if the insurer is going to suddenly terminate your benefits, and that’s always a consideration when you are offered or negotiating a lump-sum buyout.
Experienced LTD Buyout Legal Guidance
A lump sum in place of your monthly benefits is a serious consideration. Failing to arm yourself with knowledge of the process before considering a buyout could prove fatal to your claim at worth or cause you to take a lower than ideal payout at best.
Let us guide you through the process and possibly negotiate with your insurer over the terms of your lump-sum buyout. Contact me at Victor Peña Law PLLC as soon as the thought of a buyout arises. Located in Fort Lauderdale, Florida, my firm handles cases nationwide, including clients located in and around the areas of Los Angeles, Seattle, New York City, and Chicago.