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How do disability insurance companies calculate lump-sum buyouts?


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How Do Disability Insurance Companies Calculate Lump-Sum Buyouts?

There are multiple factors that a long term disability insurance company will consider when doing a buyout.

The No.1 factor is whether or not the carrier thinks they are going to have to pay you for the maximum period of your disability policy.

No.2 is whether or not the carrier thinks whether or not you are going to live till the end of the maximum benefit period.

And No.3 is the value of your policy throughout the maximum benefit period. What that means is that the disability carrier will look to pay you the present value of your long term disability policy.

Clients usually ask me when they call me, “what’s my policy worth?” And the way that long term disability carriers buy out policies, is that, they buyout for present value dollars, which means, if your benefit was going to pay you a 100,000 dollars a year, and you had another 10 years remaining on your policy, your policy isn’t worth a million dollars which would a be 100,000 times 10 (100,000 x 10). Your policy is worth the present value of a million dollars, which means, how much do you need to have today in order to get to a million dollars over the next 10 years.

While it sounds complicated to come to that calculation, we regularly work with actuarial consultants who this calculation for us and let us know what the present value is of your long term disability policy.

There are 38 opinions so far. Add your comment now.

Alison:

I have read that 40% off of the future value is a standard amount of a lump sum buyout, though they have often offered varying discounts. I am with Cigna and I understand NPV and Future Value from having been an MBA. With interest rates nearly at 0 today, is there any hopes of getting more than the 40% reduction?

Have you noticed any changes in their figurings with the reduction of interest rates over the past 5 years? Or do they just figure most people can’t understand that and continue to use higher interest rates in their NPV values? What percentages have you seen from Cigna in the past few years? Or ever? Thanks.

Attorney Greg Dell:

Alison,

I am not sure where you heard 40% as that seems to be very low from our experience of negotiating disability lump sum buyouts for clients. The lower interest rate is a great thing for a claimant when considering a buyout. A lower interest rate means that the claimant’s money will grow slower over time; therefore they need more money now. In the past three years the buyouts we have negotiated have been some of the best percentages we have seen. A buyout negotiation involves numerous factors, which depend on a claimant’s medical condition, policy language, mortality issues, reinsurance agreements, and interest rates. If you are considering a buyout we can discuss your potential options if you contact us privately.

Mersud:

Hi, my question is: if you have $500,000 policy or until you don’t reach retirement age and if you are permanently disabled which I am and not able to work, how much can you expect to get in buy out lump sum, and if you do decide to get buy out lump sum can any other party such as SS Disability, healthcare insurance such as United Health Care go after you for medical expenses paid for you medical care? So basically my question is what would the aprox. lump sum be? Thanks.

Attorney Greg Dell:

Mersud:

Thank you for your request. There are numerous factors that go into a buyout and based upon your example I could not give you an approx number. I could tell you that from our experience a really good buyout is anywhere between 65% to 75% of the present value of future benefits. The challenging issue is how the disability insurance company gets to their final present value calculation. In most cases a health insurance company cannot come after you for getting a lump sum buyout. If you have SSDI, then the disability company will usually take this into consideration when a lump sum offer is made. If you would like assistance with a lump sum buyout, we can review your claim and let you know if we can assist you. We do not charge any attorney fees unless you accept the lump sum buyout offer. Not every company engages in disability lump sum buyouts.

Louise:

I am interested in a buyout with Cigna. I have 12 years left. What type of interest rate are they using now to determine the present value of future benefits you mentioned above? Since interest rates are so low, are they only using 1 or 2% now, or are they still trying to use higher interest rates? So they figure the present value and then discount it again?

Attorney Greg Dell:

Louise,

As of February 2013, Cigna and most of the other carrier are using a rate of between 3.5% to 4.25%. While most people can barely get 1 percent at the bank, the insurance companies can actually get 3.5% to 4.25% for their money. The disability insurance companies usually rely upon on the high yield corporate bond rate which is published in the Wall Street Journal. Give us a call if you would like assistance negotiating a lump sum buyout with Cigna.

Ann Smith:

I have a long term disability insurance with the Hartford. Since I have started my retirement with teacher’s retirement they reduced it from almost $3000.00 to $300.00 per month. I requested a settlement and they said maybe they would do that in my case. I have scoliosis and Meniere’s disease, which either is life threatening if I use good judgement. The Hartford said that I am eligible for benefits until 2026. What do you think would be a possible settlement?

Attorney Greg Dell:

Ann,

We would need to know more information to determine a reasonable buyout. If you watch our video you will learn more about the numerous factors involved in a buyout.

Kim M.:

I have been offered a settlement for $12,000 for a long term disability from The Hartford. I am considered permanently disabled and receive $2800.00 a month and will get $319.00 until I am 65. Presently I am 54. Should I take the settlement for $12,000.00, or engage an attorney to get more?

Attorney Stephen Jessup:

Kim,

There are many factors that go into an offer for a lump sum buyout, such as your medical condition, language in your policy, and whether offsets such as SSDI are in place. From the information you provided it is hard to speak as to the sufficiency of the buyout offer. We have successfully negotiated higher amounts from insurance companies after an initial offer was made.

Debra Loves:

I receive $657.00 per month from ING. I’m on SSDI & of course ING received almost all of the money that was awarded me from SSDI, since it was dated back to my accident. I receive $657.00 per month from ING & that will continue until I’m 67. Last year they offered a lump sum of $53,000.00. This year they valued it at $50,000.00. I am permanently disabled but I don’t understand the value ration they are saying is 76%. Is this a reasonable amount to except? If they had to pay me until I was 67, that would amount to $121,545.00. Seems like they would be saving quite habit if $50.000 were all they had to pay. I feel like I’m being shafted!

Attorney Stephen Jessup:

Debra,

If an insurance company is looking to offer you a buyout they are most certainly doing it at a rate that most benefits them. Any offer for a lump sum settlement is based on a percentage of the present value of the policy (to include factoring for mortality ratings). If ING were to pay you out every month for the remainder of the policy the amount you would collect will always be higher than the amount they would offer for a buyout. If you do not feel comfortable with the amount being offered you have no duty to accept and can continue to collect your monthly benefit (so long as you continue to meet the terms and conditions for disability under the policy). If you have any questions about the buyout you can certainly contact our office to discuss how we may be able to assist you.

JR:

In reading through the messages here and taking all in context I am hoping for a ball park range only of what a carrier typical (recent) may offer on a buyout or if a buyout was requested based on these figures please. Again just a range to give SOME idea based on your knowledge since you have handled these before.

Total monthly received from Disability carrier 2,200.00, which is after SSDI is deducted, so this is the amount LTD carrier contract pays each month after SSDI is already deducted.

There are 228 remaining Months remaining till policy ends @ 2200.00 which equals $ 501,600.00.

Given all the variables you have listed in the way the carrier determines present value of claim and interest, what would be a reasonable offer, whether the claimant requested a buy out or the carrier offered a buy out please.

Just a reasonable range that would be typical in the above scenario please.

This is an employer policy. The disability is not life threatening, but sufficient so that there is no chance the claimant could ever perform their own occupation (carrier requested IME and the carriers chosen Physician was in claimants favor in that the own occupation was not possible) the policy also has a clause stating after own occupation if the claimant could NOT make 60% of predisability wages at ANY occupation then claimant is still disabled under terms of policy.

The SSDI was awarded based on the claimant was not able to even perform sedentary work, thus 100% disabled.

So if SSDI for some reason (it happens, I have heard) kicked claimant off SSDI, then the carrier would be liable for all the monthly benefits (revert back to benefit amount they were paying before SSDI kicked in) in turn and reciprocal.

If Carrier at some point wanted to deny the claim (you know how they are) they still would have to prove the claimant could make 60% of predisability earnings in some other occupation, which in my region is impossible.

Just wanted to give all factors in case these would also be considered in either the claimant requesting a buyout or they offered a sum and what a typical range would be reasonable (a range only is fine).

Thank you for the service here, you offer excellent information for many.

Attorney Stephen Jessup:

JR,

Thank you for comment. Please feel free to contact us to discuss how we may be able to assist you in securing the best possible buyout possible.

Mike:

Can you request a lump sum buyout if you owe them back pay?

Attorney Stephen Jessup:

Mike,

Some carriers will engage in conversations if there is an overpayment due on the claim. However, please note that some carriers do not offer buyouts as a company policy. If you have any questions please feel free to contact our office to discuss how we may be able to assist you.

Confused:

My husband is on long term disability since 2007, and received almost $2000 a month. We are going to divorce. What is my best option to have the LTD valued for in order for equalization of assets?

Attorney Stephen Jessup:

Confused,

You will need to consult with a divorce attorney as to any questions you have.

Dana:

Hello, I was denied LTD from my employer insurance company, and didn’t get nothing from them so I applied for CPP disability and get approved. Now if I sue them, how much they will pay me, since I stopPED working in 2011 and I am 52 years old? I was involved in MVA in 2008 and considered with permanent disability. I was only making 12 dollars per hour. Can you please just explaine to me how these work?

Attorney Stephen Jessup:

Dana,

If you did not properly appeal the denial of your claim for benefits you may be precluded from bringing any legal action. Please feel free to contact our office to discuss your claim further to see if we may be able to assist you.

Rick:

I have a MetLife long term disability policy. I was thinking about cashing it out and buying a home. I get 2200 a month till I’m 65. I’m 57 now, 8 more years – about 184,8400. Any idea on the amount I would get from MetLife? What would the taxes be on it? Any help would be great.

Thanks in advance,
Rick

Attorney Stephen Jessup:

Rick,

MetLife is one of the few carriers that from our experience will not offer or discuss any lump sum buyout of a disability policy. You can certainly inquire, but the likelihood of them agreeing to any buyout discussion is low.

Tired:

I am in receipt of LTD from my employer. I have been deemed permanently disabled. I also receive CPP disability. I receive $2000/mth for LTD and $500 for CPP. I am only 35 years old and I want to send a settlement offer to the LTD company. What is the best way to calculate the value (2000 * 12* 33yrs = 792K) and does it have to be done by an actuary? What amount are we looking at?

Attorney Stephen Jessup:

Tired,

Each insurance company has its own protocol to determine whether a claim is a candidate for lump sum buyout, and some do not offer buyouts at all. As such, there is no way to be able to guide you based on the limited information available. Please feel free to contact our office to discuss how we may be able to assist you in securing a buyout.

Daniel K.:

Wonderful Advice,

I am a former Department of Public Works employee that is 35 years old. My former employer is mandated under contract to pay the cost of my health insurance until I reach Medicare age. Currently the department pays $1,194.11month or $14,329/year. If I live until I’m 65 that would equal $429,879 in today’s value assuming healthcare does not go up and the Medicare age stays at 65.

The city has asked if I would be interested in a possible buy out of my health insurance.

What would a “good” buyout look like and is it typical for me or the city to throw out the first #?.

Thanks in advance for your advice.

Attorney Stephen Jessup:

Daniel,

Unfortunately, we would be able to offer little, if any, assistance as it relates to your question. I have yet to see any negotiated buyout for health insurance coverage. The scope of our practice is securing buyouts of long term disability insurance policies.

Help:

I am currently on LTD/SSDI due to Crohn’s Disease. I receive 1200 mth for LTD, 1200 SSDI and I am 42. I have been offered a buyout option of 105,000 from Aetna. My question is, is this a low offer? And if so, does Aetna tend to negotiate counter offers? It seems to me they should at least offer 200,000. Can you help?

Attorney Stephen Jessup:

Help,

Without knowing more about the factors of your claim it would be difficult to assess. Please feel free to contact our office to discuss further.

Molly:

I just received a call from my LTD insurance company. They offered to go ahead & pay the remaining few months of my LTD as a lump sum. They said it would be equal to the same total as if it were paid for each month remaining. I know that I’m a skeptic, but is it unreasonable to question possible ramifications?

Attorney Stephen Jessup:

Molly,

I have experienced situations where insurance companies offer to pay the whole remaining amount of the benefit in one lump sum. In one case it was for the remaining two years of benefits. The only issue that arose in that situation was the fact the whole lump sum amount would be taxable income for the year, as opposed to spread over two years. Additionally, this client’s policy was ending due to reaching the maximum benefit period of age 65. If your claim is “ending” due to some other reason, such as an imposed limitation in your policy, you could be potentially walking away from continued coverage.

Kiki745:

I receive 70k per year on a long term disability policy. I have 15 years left on the policy and was offered 489k to settle. This does not seem reasonable given the fact that my condition is permament. What would a reasonable amount be

Attorney Stephen Jessup:

Kiki,

Determining what a “reasonable amount” for a buyout is an in depth analysis that has to take into account multiple factors. Please feel free to contact our office to determine how we may be able to assist you in securing the best available buyout from your carrier.

Psoriatic Arthritis:

I have group LTD (CIGNA) and Individual LTD (Unum). 300k / year with CIGNA, and 200k / year with Unum. I am about to enter into STD at which point I will have 180 waiting period before my LTD kicks in. I have 37 years of benefit left until the age of 65.

Would you be able to help guide/ advice me on how to approach the coming days, and what to expect. I rely heavily on my income for myself and family, and during these hard times I would like to make sure I fully understand my contracts, what all is involved, and what to expect.

Lastly, at some point, I would like a buy out, so I don’t have to look over my shoulder every time I walk out of the door. I have read some horrible experiences online. I am more anxious about this then any of the above as my policy is a high dollar one, and may undergo unfair discrimination, and extra scrutiny.

Attorney Stephen Jessup:

Psoriatic,

With so much potential income at stake, you would be wise to take the appropriate steps to protect it now. The claims application process sets the tone and strength of a claim for benefits. The carriers could easily exploit any mistake made during the process as a reason to deny your claim. It would be wise to consult with an attorney to guide you through the process. Please feel free to contact our office to discuss how we may be able to assist you.

Sean:

I have a service connected disability from a county law enforcement agency in the amount of $3400/mo for life. Is there an option of buying out the payments? I am currently 43 years old.

Attorney Stephen Jessup:

Sean,

Without knowing the insurer (if there is a company involved) or the terms of the disability pay I would not be able to say. You can certainly inquire.

MJ:

I hurt my back at work hernated dick s1 l4 and l 5 I am getting long tern disability but they say that I could get a job doing a job other than what I hurt my self at. I have been looking for work and because of my restriction no one will hire me. If I sit for too long feet really become numb if I stand to long same thing…

I do not understand all this stuff; been on LTD for 8 months and they want to do a 2 year buyout @ 20K.
I will not be able to return to the type of work I use to do.

Attorney Stephen Jessup:

MJ,

Has your insurance company issued you a formal buyout offer letter? If so, please feel free to contact our office so we can review same and discuss with you your options.

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