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Is a Long Term Disability Insurance Buyout Settlement Right For Me?

John V. Tucker - ERISA, Disability & Life Insurance AttorneyMany people ask us about the chance to get a lump sum settlement in their disability insurance case.  The most common times that a disability insurance company will bring up the chance to use a lump sum settlement in a private disability or group Long Term Disability case are:

  1. When you have a chronic condition that is not going to improve and they have paid you for many months or years, and
  2. During a lawsuit, as a way to completely settle your claim without reinstating long term disability or disability insurance benefits (i.e. without putting you back “on claim”).

A lump sum settlement is one where the insurance company offers to pay you for any outstanding past due benefits owed (if any), plus some portion of the future benefits owed to you.  This type of settlement is also called a “buyout,” “washout settlement,” or a “walk away settlement,” because once the LTD claim is over once the lump sum payment is made.  Everyone walks away, and no future benefits are paid.

Let’s talk about what you need to analyze to decide if a settlement is right for you.

The starting point:  you have to understand “Present Value” and the “Time Value of Money.”

If the disability insurance company owed you $100 today and you deposited it into your bank account, it would grow over time to be worth more than $100, because you can earn interest. This is a function of what is called the time value of money.  Put simply, getting that $100 today is more valuable than getting it next month or next year.  The reason is the interest you can earn on that money.  The reverse is true also – the value of receiving that $100 next month or next year is less than $100 today.  You will have lost the time to earn interest on that money, so the present value of money you get in the future has to take into account the interest you would need to earn to get you up to the amount owed to you in the future.

Present value is why a lottery winner can take $20 million in lotto winnings as $1 million a year for 20 years, or take a one time cash payout equal to $6 or 7 million today.  The lotto winner can earn interest on that one time payment so that in 20 years, it would grow to the same $20 million they would have gotten if they had taken the $1 million per year over 20 years.

Financial professionals use a calculation to account for the time value of money, often called a “present value calculation.”  This calculation determines what amount of money you would need to get today, assuming some reasonable interest rate, to equal an amount in the future.   For example, assume your disability company owes you $100 in 12 months.  If they paid you $100 today, you could earn interest on that, and it would equal more than $100 in 12 months.  The time value of money tells us that some smaller amount – say $97 – would be the amount they have to pay you today to equal $100 in 12 months.  This calculation has to be applied to your future Long Term Disability insurance payments to calculate what the total value of your claim is worth.

It is important to understand this concept, because the present value of your future LTD benefits needs to be calculated to know how much is at stake.  You cannot simply add up all of the future payments, because that overstates how much your claim is worth due to the time value of money.  Unless you have a financial background and know how to make this calculation, it is strongly recommended that you consult with an attorney to make sure this calculation is accurate.

An example of the present value of the future payments in a disability insurance benefit claim.

Let’s assume that you are 52 years old and disabled.  You suffer from conditions that you do not expect to improve.  For this example, you expect to receive disability insurance benefit payments under your private disability policy or an employer’s group plan until age 65.   Your payment (after any offsets or reductions that your policy allows such as  a reduction for Social Security Disability payments) is $4,350 per  month.  Your policy does not have a cost of living adjustment or any future increases, so you expect to receive this same amount every month until your 65th birthday.

Consider using the Treasury note rate which most closely approximates the time over which your future payments will be made. In this example, we are going to assume a discount rate of 2.05%.  This is a conservative, but reasonable figure at the time this is being written.

Financial Calculator

Use a financial calculator to determine the present value of your future Long Term Disability Insurance payments.

You are looking at 13 years of future benefits.  Assuming your birthday just happened, that is 156 months.  If you just added up the $4,350 monthly payment, that would be $678,600.00.  However, when we calculate the present value using a financial calculator with the 2.05% discount rate, the present value equals $595,146.71.  That is the true current value of that stream of 156 future monthly payments, because of the time value of money.

Know that the disability insurance company will not use the same discount rate that you use when they do their calculations, so their present value will likely be lower than yours.

Most disability insurance companies use a corporate bond index, not the U.S. Treasury rate to determine their interest factor.  At the time this is being written, current corporate bond rates are running from 3.07% to 3.88%  Expect the disability insurer’s bean counters to use the highest interest rate, because that means the lowest present value for you. Why? If you can earn more interest on your money, you do not need to receive as much today.

Using the numbers from the example above with a 3.88% discount factor, the present value calculation would equal $532,191.94.  In our example, that simple change in the discount factor means the LTD insurance carrier’s present value number is nearly $63,000 LOWER than your number; and they will likely negotiate using their number.

Can you change their thoughts about their number.  Probably not.  Right off the bat, this is one reason that a lump sum buyout settlement may not be right for you.

What are some factors to consider if the insurance company is offering a settlement while they are paying your Long Term Disability benefits each month?

Know that disability insurance companies will typically only offer settlements to people who are on claim (receiving monthly disability benefits), when the insurance company expects the claimant will not get back to work.  That means a person who is on-claim has the strongest case.  Why?  The insurance company has accepted that person as disabled.  The evidence must be very clear for the disability claim representative to agree that you are disabled, and for the company to pay you for some time.

Some other things to consider:

  • The nature of your condition will play into how much a lump sum offer may be. Insurers are ready to accept some conditions as permanent, while others they view as transitory.
  • If your disabling condition is terminal, it will impact how much a disability insurer will offer.  For example, a person with end-stage cancer who has months to live will not likely get an offer to settle their case for an amount worth many years of benefits.  The insurer will not offer more benefits than the time period when they believe you will live.
  • If you are offered a lump sum settlement while you are on-claim, you will necessarily be taking less money up front which is guaranteed) versus receiving more money over time.  Disability carriers offer a percentage of the future benefits.  They will not pay you 100% of the money they owe you in the future, because they might as well hold on to their money and send you a check each month.  Internally, they have decided upon some amount that makes sense for them to pay where they actually make money on the settlement.  In other words, know that you are settling for less, and that the insurer is going to want a good deal on their end to buy you out.
  • You may ask questions!  You may ask how they calculated their offer.  You may ask why they are offering you money.  You may even ask how long they believe your disability will last.  Try to be armed with as much information as possible.

Finally, know that you do NOT have to settle.  Just because your disability insurance company offered a buyout settlement on your LTD claim does not mean you have to take it.

If you are in a lawsuit with the disability insurance company, what are the factors that will decide if you win or lose your case?

Having an experienced disability insurance attorney is crucial during litigation, because you need to trust and rely upon your lawyer’s advice.  You should ask your attorney questions to make sure you understand what is being offered and the possible outcomes if you take the deal or not.

There are many factors that go into whether you have a stronger or weaker chance of winning in court.  Ask your attorney for their opinion about the following factors:

  • Is the evidence of your disability strong?
  • What law applies to your case – state insurance law or the federal employee benefits law called ERISA?
  • If state law applies, what aspects of the state law make your case stronger or weaker?
  • If ERISA applies, what standard of review will the court use?  Are you allowed to submit more evidence to the court, or will the evidence be limited to the pre-lawsuit claim file (this is very common)?
  • If the insurance company sent you to their doctor, how does that impact your case?
  • Did your doctors document your disability – your restrictions and limitations, not just your diagnosis and symptoms – well enough to win?
  • Will your case go to a judge or jury?  If a judge, what is the attorney’s view of the judge’s past rulings compared to your case?
  • If you did not hire an attorney to handle your pre-lawsuit appeal, did you put together a helpful appeal or did you hurt your case?
  • What other factors weigh in favor or or against your case?

You make the decision to settle a case, not your attorney.  They can provide you with a recommendation.  You hired them for a reason, but you need to know if your lawyer just wants to settle or is willing to fight for you.  While it is a good idea to follow their recommendation, you need to understand why they are making that recommendation so you can decide to settle or not.

Nothing requires you to settle your disability insurance case, and you need your attorney to explain what will happen if you decide not to accept a buyout.

Non-legal reasons to consider.

As attorneys, we can advise our clients about the law and how we expect the law will interact with the facts of their case.  However, there are many reasons outside the law that could impact whether you settle, including:

  • Are you tired of dealing with the insurance company and their forms?
  • Do you have financial pressures that require you to settle?
  • Is the stress of dealing with your claim too  much?
  • Do you have family pressure or stress because of the disability insurance company?
  • Are you willing to fight the insurance company over principle even if it costs you money?
  • Are you prepared to settle in for a long fight if you are in court?
  • What if you win, and the insurance company appeals?
  • How will you feel if you lose your case and get no money?

While these do not go to the strength of your legal case, they are legitimate factors for you to consider.  Understand that these are based upon feelings and knowledge within you.  No legal advice can explain how these factor into your decision, but you should consider them.

How much will the disability insurance company offer to lump sum settle your disability case?

How much you should accept for a lump sum settlement in a disability insurance case differs from case to case.  It depends on your facts, your jurisdiction (the state or federal district in which your case is pending), and the factors discussed above.

If you are on-claim receiving monthly disability benefits, do not be surprised to see your disability insurance companies offer between 50% and 70% of the present value of any future disability payments owed to you.  As noted above, when you are on-claim, you have the strongest case, and it may not be in your best interest to settle.  Our firm is not a settlement mill (we do not push our clients to settle), so we rarely encourage our clients to lump-sum settle when they are on-claim receiving benefit.  You will maximize your disability insurance benefits if you stay on claim and make the insurance company pay you until you are 65 or whatever the ending age is for your benefits.

If you are in a lawsuit against your disability insurance company, depending on where you are in the country, some disability insurers may offer you as little as 15% or the present value of your claim.  In other cases, you may see offers as high as 60% or 70% of the present value.  Keep in mind that they are not paying your benefits when you are in a lawsuit.  You also may have little bargaining power depending on any pre-suit appeal you filed or the law of the jurisdiction in which  your case is pending.  Hopefully, you hired experienced disability counsel who can advise you as your work through the settlement  process.

John V. Tucker has been representing disability insurance clients in private disability and group disability claims for nearly 25 years.  If you have questions about a buyout or settling your Disability Insurance or Long Term Disability claim, call (866) 282-5260 to schedule a free consultation.

 

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    I appreciate all of your information on the time value of money. Sometimes this is something that confuses me, and confusion is discouraging when you are dealing with things as important as this. One thing that I think could be a big help to me is finding the right professional to assist me while I try to get a long term disability claim. Do you have any tips for how I might do this?

    I am on LTD and received letter stating that this LTD trust is being dissolved and I will be receiving a LTD Lump Sum payment. I have no choice in matter. I was sent a tax withholding form showing I currently have listed for Federal tax and State tax filing single with 0 exemptions. On form I can change this to a have specific $ amount or % taken out instead of my normal tax withholding. My question is, can’t I take this money with no Taxes taken out and put it in an tax deferred account. I am told that I personally have to receive money and can’t rollover to IRA tax deferred or something similar.

    Ms. Hefner, I likely do not have enough information to give you an opinion about that. I recommend you speak to a financial planner or CPA for tax advice and to discuss the possibility of a rollover. I would not expect that you might be able to rollover a lump sum LTD payment, as very few are disability payments from retirement plans, but it could be possible. That is why someone would need more information to give you an opinion, and you really need tax advice, so a CPA is probably the way to go. I wish you the best of luck. John Tucker

    It’s interesting just how much you have to think about when pleading for your disability case. I didn’t even know that the way your information was documented by a doctor could affect your ability to get the payment you need. If that’s the case, it sounds like you need to get a lawyer as soon as you know that you’ll be applying for this. That way, you’ll get the best guidance possible from the start.

    I’m trying to find a answer to my question,and can not find it. Maybe you could help me. I have won my SSD,and received total payment. And my LTD company wants their back pay,understood.So two days ago I received a lump sum buy out,for the exact amount of back pay that I owe to them,with an extra one hundred dollars for me to keep,and they get the rest,the exact amount I owe. Any information you can give me to help me understand what they are doing,,,,I’m cautiously considering,,but like they say if it’s to good to be true,step back for a moment.

    Unfortunately, without knowing more – like how long your payments will continue in the future as a start – I could not even begin to guess at the logic behind their offer. You will want to calculate the present value of the future stream of payments as your starting point, and it may answer your question. They may be offering you some percentage of that amount.

    My LTD Policy is forcing me to make a settlement. Was a corporate policy from by employer BCBSFL. My benefits started in 2004 and were to end on my 65th birthday in 2022. The Insurer is trying to deduct Social Security from the Settlement to age 65. I have several issues. The present value calculation was ridiculous, the i rate calculation ridiculous, other deductions, but my question is the Insurer’s deducting my full Social Secuirty (SSN) to age 65 from the settlement.. I have taken the position that if SSN stopped payments to me, would the Insurer pay the money back that they deducted? I also have taken the position that the SSN deduction is transactional and is deducted each month from my benefits. I agree they can take the SSN deduction when they made the settlement payout, but the Insurer has not right to deduct the SSN benefit to age 65 as I no longer am getting monthly payments. Also, the Insurer does not control the benefit, there are no longer monthly LTD payments to deduct SSN from, and there is no guarantee of reimbursement for the deduction if SSN stops payments to me. Can you help me? Do I have an argument? If the ERISA appeal fails, I will need an attorney to represent me legally – your firm? I had Stage IV Cancer and survived but suffer from post chemo, readiation and surgical health issues. Even the insurer has declared by permanently disabled. Total balance of payments $660,000 from now to 2022. The forced settlement $474,000.

    To start off, I am not sure how your insurer can “force” you to settle your claim. I have never seen a disability plan that can require that. Typically, that is a choice both sides must willingly make. If one side or the other does not want to settle, then it does not happen. As to whether they can calculate the present value using an offset of future Social Security Disability, there is nothing improper or illegal about that. It is not a mandatory payment, so they can calculate it however they want. You do not have to agree with it, but that goes into whether you settle or not. I am not sure what you would be appealing though. I would be happy to talk to with you about it. Please call us at (866) 282-5260, and my team can set you up for a time when we can talk.

    Hi
    I am on permanent disability. The physical problems I have is long term. I am on Social Security Disability and I heard about this lump sum buyout. How do you calculate what you will receive in the “long term?” I do not want to leave myself without insurance since it is imperative that I see my doctor every 3 months. However, our financial situation is dire at the moment since I can no longer work. I’ve asked my doctor if I could go back even part time and it was an emphatic NO. I can no longer drive since I am losing much of the use of my legs.
    If you could please advise me or tell me where to start I would appreciate it. I want to make sure I do not sabotage myself. I do have insurance through my husband’s job so I won’t be totally without insurance. I just want to do the right thing, I am 63 years of age and my condition is not terminal but it is permanent, no hope for future wellness.
    Thank you
    Liz Cohen

    To be clear, lump sum buyouts apply to Long Term Disability (LTD) Insurance, not Social Security Disability (SSD). You will need a present value calculator to calculate the present value of your future LTD payments. There are many online, but here is a simple one: https://financialmentor.com/calculator/present-value-of-annuity-calculator.

    When you say “leave myself without insurance,” I am not sure if you mean LTD or health insurance. If you settle your LTD case, you will no longer get monthly payments and your LTD insurance will be over. I do not know if you currently have health insurance through your former employer, but that will likely end too if you settle your LTD case….but it may not. That depends on your employer. Keep in mind that you get Medicare after you have been on Social Security Disability for 24 months. You indicated that you have health insurance through your husband’s job. That will become secondary to Medicare once you take it.

    So where do you start? Calculate the present value of your future benefits. Your LTD insurance carrier does not have to settle your case, but you may certainly ask them if they are willing to do that. You can also investigate whether any health insurance you have through your company (not your husband’s) will continue.

    Good luck!
    John Tucker

    Thank you for the very helpful info, it helped me understand the LTD buyout offer that I recently received from my insurance company. I do have a question. I been on claim for the past 5 years and have 4.5 year until age 65 when my benefit will be terminated. The offer is about 60% of the future value, i think it is a bit low. I have no financial pressure so I plan to not to accept the the offer. I think insurance company offer buyout is because they don’t want to pay anymore money, if I don’t take the offer now, would they revenge by finding other way to cancel my benefit? Have you seen that happen? The LTD insurance is Cigna.

    Maddie: Thank you for your comment. I have seen that happen with Cigna, but keep this in mind: you are in the strongest position you will ever be in with Cigna, because you are on-claim. They are deciding each month that you are still disabled. If nothing changes, they will have a very weak case to cut you off. Yes, it would be hassle for you, but the possibility of them trying to cut you off usually should not be the driver on whether you take a fraction of the money they owe you in the future, unless you have some other factors that weigh in favor of lump sum settling at this point. As attorneys, some of our best cases are people that have been cut off. It happens, but once someone has been on claim for years, it is much more common for them never to cut you off….as AS LONG AS you keep seeing your doctor and documenting your symptoms/limitations/restrictions (read this post for more info on that: Talking About Your Limitations Is Crucial to Winning Disability Claims ). Those visits with doctors are what prove your condition has not changed, and back up those disabling restrictions. Of course, if they ever cut you off, please call us for a free consultation to learn about your rights. Good luck!

    To get a lump sum , on a long term disability, pay out are you better to hire a lawyer, from the start. Massachusetts ,

    Eileen, thanks for your question. It does depend on the insurance carrier somewhat, as well as the specifics of your claim. I have often been able to negotiate a higher figure for clients, but not in every case. Some carriers will only make one offer. There is certainly no reason that must have a lawyer to ask for a lump sum or to try to negotiate a lump sum to start, but there are many claims were it will help. Good luck, and let us know if we can assist you (or help you find a local attorney if you do not have an ERISA group claim). Feel free to call us toll free at (866) 282-5260.

    Mr Tucker – thanks for this well-written article and answers to questions. You discuss the insurer offering to settle – what about as the insured offering to settle instead? I’m 53 and have been on claim LTD for approx 2 years with several permanently disabling conditions. I’m attempting to wrap up debts incurred from when I was fully able to work and find myself in need of downsizing my life and a buyout would help tremendously. How open are LTD carriers to a request by the insured triggering the negotiation? Is that a bear I should not poke so to speak, or should I simply wait and hope that they offer? Also, in a calculation for present value of future benes, shouldnt there be some deduction for what offset the insurer would receive once SSD kicks in and reduces their obligation? I have a plan that requires a dollar for dollar reduction for SSD received. I did apply for SSD but was denied in what was a rather cursory review but no obligation to appeal so I didn’t push. How much will that likely factor in to their openness to a buyout? Finally will a lawyer such as yourself take something on such as the above negotiation on a contingency basis?

    Let me give you some general answers to your questions – in italics below (for specifics, we would need to talk – you can call us at (866) 282-5260):

    How open are LTD carriers to a request by the insured triggering the negotiation? Is that a bear I should not poke so to speak, or should I simply wait and hope that they offer?
    Asking for a lump sum settlement is often a red flat. I rarely recommend it.

    Also, in a calculation for present value of future benes, shouldnt there be some deduction for what offset the insurer would receive once SSD kicks in and reduces their obligation?
    Yes, you have to figure in the offset for SSD. If you did not pursue SSD, that could hurt you.

    How much will that likely factor in to their openness to a buyout?
    Yes, they will.

    Will a lawyer such as yourself take something on such as the above negotiation on a contingency basis?
    Yes. It depends on the case for how much such a fee would be.

    Again, call us if you would like to discuss specifics. All the best.

    24 years with NSPI, mental illness dissability being treated for 22 years. Ltd cancelled after 5 years. Insurance about to make an offer. Discovery hearing was Monday past. I’m waiting to hear from them. But have absolutely no money smarts. May have to see a chartered accountant for financial advise. Your article was very helpful. Thank you.

    My name is Alex DeGuzman; I have been on long term disability since 2009, and the chances of going back to work are currently zero. UNUM, who is the insurance company handling my long term disability payments wants to settle, but unfortunately the sum appears to be lower than your examples (much lower).

    Anyway, rather than going into detail within this message, I would discuss this situation with you ASAP. I have until the 28th of March to make a decision.

    Please call us toll-free from anywhere in the U.S. at (866) 282-5260 to discuss your Long Term Disability case with Unum.

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