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.
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