Should You Consider an Individual or Group Long-Term Disability Insurance Policy Buyout?
If you filed an individual or long-term disability insurance claim that your insurer approved and you have been on claim for more than one year, your insurer may offer you a one-time, lump-sum payment—as opposed to continued monthly payments.
Lump-sums are enticing. They provide you with a sizeable amount of money upfront, and they immediately ensure that you will get a certain amount without more claim hassles. Without doubt, the buyout course of action has many advantages.
The obvious disadvantages: Once you accept a lump-sum payment, your policy is voided—and you have no further rights to it. Your individual or group long-term disability insurer will have bought you out of your disability policy.
Because the lump-sum you are offered is an estimate of the amount you would have likely received incrementally during a long period of time, disability insurers may underestimate this figure in bad faith—initially offering to pay you much less in the long run than you would have received through monthly payments.
These considerations and more can make some disability policyholders realize that, based on their circumstances, a lump-sum buyout is a second-best option.
Don’t let the size of a lump-sum offer fool you. It is meant to feel attractive and hurry you into a financial decision—made hastily, due to the lump-sum dollars’ dazzling effects. By their very nature, lump sums will seem loaded. And, in some sense, they are—but, are they as loaded as you need and deserve?
Individual and long-term disability insurance companies can offer payouts that severely undervalue your policy’s future disability benefits. Remember that by buying you out, your plan ceases to exist. Think long-term: Is the lump-sum that your disability insurer offered you truly the right decision? Is your illness difficult to treat and harder to document? Is your life expectancy reduced because your risk of dying before the policy ends is real? Do you need to fund a child’s education or do estate planning that a lump sum could solve?
These are the real questions that you must ask. The top-rated disability insurance lawyers and ERISA attorneys at DarrasLaw can help you answer these and all of your buyout questions.
Before you agree to a lump-sum buyout, understand and discuss with an expert disability attorney at DarrasLaw to go over the terms and conditions so you understand clearly the pros and cons of your specific offer.
Why Individual and Long-Term Disability Insurers Offer Buyouts
The reasons for offering lump-sum buyouts may differ from insurer to insurer and from case to case. Some disability insurers may not offer lump-sum buyouts at all.
In many cases, however, the motive underlying a lump-sum buyout offer boils down to this: The buyout costs disability insurers less money, due to numerous factors.
How Do Disability Insurance Companies Calculate Buyouts?
Each company has its own methodology to determine the exact amount. Disability insurers, however, will generally look at your mortality rate—whether you will live to your policy’s maximum payable benefit period—as well as your morbidity rate, or the likelihood that you will recover fully or partially before you reach the maximum benefit period.
Disability insurers may also consider the following in their calculations:
- Your current age
- The amount of reserves set aside by the disability insurance company to cover your policy
- The present value of future monthly disability income benefits potentially owed to you
The present value is a calculation disability insurers use to account for the time value of money. It determines what amount of money you would need to get today, by assuming a specific interest rate, to equal an amount in the future at the end of the policy.
In other words, if your disability benefits amounted to $150,000 per year, and you had 10 years remaining on your policy, you might think your policy would be worth $1.5 million today.
However, your policy would be worth the present value of $1.5 million, or how much money you would need to invest right now to get to $1.5 million at the end of 10 years.
Your disability insurer will discount your buyout offer to this present value of your disability policy or claim and add a morbidity discount as well.
Keep in mind: Buyout offers don’t amount to 100 percent of the present value, because that creates no financial benefit for disability insurers.
The multitude of factors that go into calculating a buyout can sometimes make it difficult to know if you are receiving a fair and reasonable offer.
That’s why you should hire one of the seasoned lawyers at the top-rated law firm of DarrasLaw. We know how disability insurers try to underinflate your valid disability claim, and how to calculate its true worth. We can help you decide whether a lump-sum buyout makes financial sense or whether to try to continue to collect monthly benefits.
Pros of a Buyout
You might consider accepting a disability insurance buyout from your insurer, as opposed to staying “on claim” if you’re already receiving disability benefits, for good reasons.
Buyouts can provide your loved ones with the security that your policy may not. Generally, disability insurance policies do not contain rights of survivorship, meaning that your disability benefits cease when you die or are no longer disabled, and surviving relatives cannot inherit them.
A lump-sum payout, however, is yours to keep and to pass on to family upon your death, if you so choose. You can spend or invest it in the manner you prefer, such as by paying down debt or creating a retirement fund.
The Journal of Financial Planning provides other pro-buyout considerations, including:
- The claimant has found business or employment opportunities that will use past skills and education but not conflict with the claimant’s medical symptoms, which may invalidate future individual or long-term disability payments under a traditional, monthly payment system.
- The claimant no longer has to deal with disability claim forms, progress reports, attending physician statements, independent medical evaluations, functional capacity evaluations, video surveillance, field investigations, submission of tax returns, and other documents after approval of a buyout.
- The claimant won’t need to worry about a change in claim administrators, the disability insurance company’s claim management philosophy, or disability claims processes or personnel, all of which can cause delays and denials.
- The claimant might get better and return to the occupation held before the disabling injury or illness, thereby terminating disability benefits. In that case, a claimant may receive more in disability payments with a buyout.
Cons of a Buyout
Despite its many advantages, lump-sum buyouts are not for everyone. Keep in mind that, notwithstanding any pressure a disability insurer may attempt to throw your way, buyouts are always voluntary. Your disability insurer cannot force you to accept a buyout.
Consider the following: You may receive an offer that undervalues the remaining disability benefits of your policy. You can determine this by multiplying monthly payments that you receive or would otherwise receive by the number of months remaining in the policy. Is your lump-sum buyout offer less than this figure?
There is also the concern of financial management. If you worry about your ability to manage bigger sums of money—or even the security of a lump sum in the long run—you may exercise prudence by turning down the buyout.
ConsumerFinance.gov lists many things to consider before accepting a lump-sum buyout, but the following are particularly prudent:
Do you have other options? If you are having trouble paying your bills and see a lump sum payment as an opportunity to get out of debt, first contact your creditors to see if you can work something out. If you have hospital bills, check and see if your hospital has a “charity care” program or a way of providing free or reduced prices.
What are the costs? Get a written statement with the following information from the company:
– the total dollar amount of all your remaining monthly payments
– the value in today’s dollars of that total dollar amount
– the number of payments remaining
– how much you would receive as a lump sum
– all fees, interest or discount rate, and costs.
Do you have to pay taxes? Your monthly buyout may be tax-free. Receiving a lump sum payment may have tax implications. Consult a tax advisor before signing.
Will there be an impact on public benefits? If you receive public benefits, or plan to in the future, getting a lump sum payment may impact your eligibility. Check with your lawyer, your local legal aid office, or the department that administers those benefits.
Are there related complaints about the company? Check with your state Office or state consumer protection office.
Keep a Running File
If you receive a buyout offer that you feel severely undervalues your disability claim, negotiating a better lump-sum value is an option in some cases. Documenting your disability claims with paperwork and statements can help you— and help the experienced individual and long-term disability insurance lawyers at DarrasLaw help you in the event you reach out to us.
Keep or retrieve copies of everything related to your disability claim. Such documents can include, but are not limited to:
- Any documents providing additional information that your disability insurance company requested or that you voluntarily sent to your disability insurance company, like medical chart notes, provided by your treating doctor, that support your disability claim.
- An Explanation of Benefits letter or some form or document showing the disability benefits to which you are currently or recently entitled.
- Notes and dates from as many phone and email conversations as you have had so far with people related to your disability claim or buyout offer(s). Always try to include things like the day, time, name, and title of the person you talked to, as well as any important information shared or discussed in the conversation.
Do You Have Questions About Your Buyout? DarrasLaw, The Nation’s Top-Rated Disability Insurance Law Firm, Can Help!
Disability insurance companies act in bad faith more often than you might imagine. Lump-sum payments are often wolves in sheep’s clothing. They are enticing, but you may realize that you’re getting the short end of the buyout stick.
If your disability insurance company offered you a lump-sum buyout, contact DarrasLaw’s top-rated individual and long-term disability insurance attorneys to evaluate your case.
At DarrasLaw, our disability insurance lawyers have seen, evaluated, and resolved more individual and long-term disability cases than any other firm in the country. We are here to assist and fight for the disability benefits you deserve.
Our founding partner, Frank N. Darras, and his firms have recovered nearly $1 billion on behalf of people who were probably just like you—unsure of where to turn. Turn to us. While insurers have a right to protect their business interests, they should not do so by using bad-faith tactics that undervalue your disability claim and benefits. There is no risk involved in contacting us.
For a free policy analysis and claim consultation, reach out to DarrasLaw. Call us today at (800) 458-4577 or email us to schedule your free consultation.