What Is a Good Lump Sum Offer on My Long-Term Disability Case?
Long-term disability insurance covers people against the financial impact of unexpected injuries or sicknesses that leave them out of work for an extended period (or permanently). People covered by long-term disability insurance can receive periodic monthly payments for as long as they are disabled and their carrier agrees, or a single lump-sum payment that (in theory) reduces all of their future expected benefit payments to a single number with the surrender of their certificate or policy.
Clients frequently ask us how to evaluate whether a long-term disability insurer has offered a good lump sum payment. Let’s explore the answer.
How Lump Sum Calculations Work
To evaluate any lump sum long-term disability payment offer, it helps to understand the variables that go into calculating a lump sum. Broadly speaking, lump sum offers depend on three factors: the amount of future expected benefits, the current discount rate and their mortality assessment before the end of the policy period as a result of their disabling conditions.
Future Expected Benefits
A long-term disability insurance policy covers you against current and future monthly benefits associated with a disability. The policy usually spells those coverages out in detail, but sometimes it still gets complicated figuring out whether a policy covers a particular type of disability or for how long.
To come up with a lump sum, you need to know the amount of money you could reasonably expect to receive over time under your policy. That means calculating the total likely amount of covered costs. Calculating an accurate, reasonable number often takes a thorough understanding of how to interpret long-term disability policy language and the ERISA federal laws in the jurisdiction which you live.
It will probably come as no surprise that long-term disability insurance companies take the most conservative, limited approach to this calculation that they think they can get away with. They read the language of insurance policies in a way that limits the types of disabilities and costs covered, and predict the lowest values of covered costs that they possibly can. This is all by design. Insurance companies make money by holding onto it, not by paying out big claims.
Fortunately for disabled people covered by long-term disability insurance, experienced long-term disability claims lawyers spend their careers delving into the details of calculating the future expected benefits of a policy. They know the nuances of what ERISA law says a policy should cover, and they work with experts in medical and actuarial fields to come up with accurate predictions of the present value of the future benefits with a fair discount rate. With this knowledge in hand, they can push back against insurance companies’ conservative approach to the calculation of total expected benefits, and in many cases, can convince the carrier to revise their numbers upward.
Knowing the total expected amount of benefits is only half of the equation, however. You also need to know the discount rate applied to figure out the proper “present discounted value” of that amount. Here is what that means.
Money in hand today is worth more to a person than money that will come in the future. Or, put another way, money invested grows over time by earning interest or through the appreciation of an asset. So, $1,000 that you will receive a year from now is worth less than $1,000 in your wallet today; specifically, it is worth the amount of money that, if you had it today, would grow to $1,000 over the upcoming year through the accumulation of interest or appreciated value.
The discount rate is a number, usually expressed as a percentage, that represents how fast you expect money to grow over time. You need to know this number to calculate what the money you have the right to receive in the future is worth today.
The “present value” of money (its value today) goes up as the discount rate goes down. In financial terminology, we say that the two numbers are “inversely correlated.” All that means is that if your money hardly grows at all over time because interest rates are close to zero, $1,000 one year from now is worth very nearly that much today. If your money grows a lot over time because interest rates are high, then your $1,000 one year from now might be worth substantially less today.
Insurance companies tend to want to use relatively high discount rates to calculate the amount of a lump sum. Assuming that the money they pay you as a lump sum will grow at a steady clip over time into the money you need to pay disability-related expenses, they try to justify paying you less money today.
Experienced long-term disability claims lawyers, however, keep their fingers on the pulse of what constitutes a reasonable discount rate under present economic conditions. In staying up to date, lawyers protect their clients against an insurance company assuming an unreasonably high discount rate to justify paying a lower lump-sum than a disabled policyholder deserves.
Insurance carriers will also evaluate whether your disability gives you a higher chance of dying before your benefits end. Mortality is 100% certain for all of us, as we are all going to die. Insurance risk is assessed depending on the injury or sickness. As an example, if you have a mental nervous disability the carrier might look hard at whether the insured has had any suicidal ideas or suicidal ideation with a plan. Obviously, a suicide would end a policy’s benefits, thus the mortality assessment.
Considering a Lump-Sum Payout? Talk to a Long-Term Disability Claims Lawyer
We strongly advise anyone considering the option of accepting a lump-sum payout of their long-term disability insurance benefits to consult a top-rated disability insurance lawyer who has years of experience pursuing insurance claims on behalf of clients. Without the advice of a seasoned professional, beneficiaries of these policies risk falling prey to tactics insurers use to undervalue a lump sum, relative to what a beneficiary would otherwise receive over time.
Do not make the mistake of thinking that a large-sounding lump sum figure means an insurance company has offered you a fair amount of money. Chances are, you deserve more. A skilled, diligent, long-term disability claims attorney can negotiate with an insurer on your behalf to ensure that you receive the amount of money you need to pay your disability-related expenses for years to come. Contact DarrasLaw today for a free initial consultation.