There are two key questions to consider when faced with the possibility of a settlement (also known as a lump-sum settlement or policy buyout) of a long term disability insurance claim. The first question: is it likely that your policy permits a settlement of your long term disability claim? Second question to ask is this: what is the present value of your LTD claim?
Start from the premise that insurance companies are run on strictly mathematical formulas that measure their exposure/cost and likelihood that they can give you the least possible amount of money to stop badgering them to pay on your claim. Add in the cost to the insurance company to continually harass you and deal with your appeals. Finally, consider from the insurance company’s point of view, how long they expect that you will live with your disability.
Frankel & Newfield handles disability claim settlement negotiations for our clients across the country, so our experience informs the process. We know, for instance, that certain insurance companies are more likely to negotiate from the lowest possible number and those who take a heavy-handed “take it or leave it” approach. This information gives us and our clients perspective that they may not otherwise have, and helps in the decision making process.
First, your contract:
How long will your claim be paid?
When, if at all, does your claim change from own occupation to any occupation? This will impact on how hard a squeeze the insurance company can put on you to get any job that you can perform with your disability.
Is your claim potentially payable for lifetime, or to Age 65 or to Normal Retirement Age?
Does your contract permit you to be offered a lump sum payment or buyout?
Now, to the numbers:
How much are you being paid every month?
How long do you expect to live? This is a chilling but necessary calculation to do. Insurers typically reduce the value of the future stream of benefits to reflect “mortality,” a concept that assesses whether you will die prior to the expiration of your contract. Insurers also assess “morbidity, “a concept that contemplates whether you will be able to return to work.
What would you be able to earn on this money if you invested the entire sum?
In a low-interest rate environment, the possibility that you will be able to invest the entire sum of the settlement and that it will keep up with inflation and cost of living increases is not as good as it once was. There was a time when a big payout meant one sure thing – a claimant could use the money to invest in conservative, low-risk investments and their income for life would be assured. This is currently not the case.
What is your tax bracket? If your disability insurance policy was paid for by your employer, a settlement will likely be subject to income taxes. If you purchased a private policy, with after tax dollars, there may be no taxes incurred.
Speak with an experienced disability attorney and a knowledgeable CPA with experience in this very specific area.
Once you have the correct information, it will be easier – not easy, but easier – to decide what the correct value of your settlement should be. An experienced disability attorney will be able to guide you through this complex process.