Long-term disability benefits can be a lifesaver for people who are no longer able to earn an income due to sickness or injury. If you are not able to work for months or even years at a time, it is a relief to know that you will still be getting a monthly check to help pay for your necessary expenses.
However, there may be an alternative option: a long-term disability buyout. If you choose to go this route, instead of getting monthly payments until your policy limits expire (which could be until retirement age), you will receive a lump sum payment from the insurance company to buy out your disability insurance claim.
But is it a good idea? To answer that question, you need to understand what your long-term disability claim is worth. In this blog post, we will examine ways to do this.
What Factors Can Affect the Value of a Disability Insurance Policy Buyout?
There are a few major items that will be taken into consideration when valuing your long-term disability claim. While nothing compares to a disability insurance lawyer’s personalized assessment and calculations, here are a few factors you must consider.
The total value of your remaining benefits
This is simply your monthly benefit multiplied by the number of months left of coverage. If, for example, your monthly benefit is $3,000 and you have 15 years until benefits end, the full value of your long-term disability benefits would be $540,000 ($3,00 x 12 x 15). However, for the reasons below, your settlement offer will never be this high.
The net present value (NPV) of your future benefits
The value of $3,000 today is not the same as the value of $3,000 in another 10 or 15 years, due to inflation and other factors. So, to calculate the buyout, the insurance company will take an estimate of what your future benefits will be worth using “present value,” or today’s dollars. This is known as a discount rate, and depending on how much longer your benefits are scheduled to last, this could result in your buyout value being significantly less than your NPV.
Your life expectancy
If you die before your benefits are scheduled to end, your payments simply stop, whereas the remainder of a lump sum could be passed on to your heirs. If the insurance company believes you are unlikely to live to the end of your benefits period, they will offer you a lower buyout settlement.
How long you are likely to need benefits
If the disability insurance company feels that you are likely to be able to return to work before your benefits expire, or believe they will have a good reason to dispute your claim in the future, they may refuse to offer a buyout or reduce your buyout offer.
- Related Article: 5 FAQs About Private Disability Insurance Claims
Pros and Cons of Taking a Lump Sum Payment
Taking a lump sum buyout comes with both advantages and disadvantages. If your insurance company offers to buy out your LTD claim, you will have to consider carefully which choice will be best for your unique circumstances.
Also, it is important to keep in mind that your insurance company would not be making the offer unless it believed that it would save them money in the long run. Although you might agree that it is the better option for you as well, the insurance company has their own interests at heart—not yours.
Advantages to Settling Your Long-Term Disability Claim
The main advantage to taking the lump sum is that it puts you in more control over your long-term finances. You may feel that you will come out ahead if you are able to invest the money, rather than continuing to draw a smaller monthly benefit payment (which, due to inflation and cost of living adjustments, may not be worth as much later as it is today). Or, you may simply be sick of dealing with the insurance company, worried that they may try to dispute or challenge your disability status in the future, or looking to build a “nest egg” for your children after you die.
Disadvantages to Settling Your Long-Term Disability Claim
The main disadvantage is that, once you settle, the matter is closed and you can no longer go back and receive regular payments. If you run out of money—whether because you mishandled it, or had additional unexpected medical expenses, or outlived your life expectancy, or any other reason—you will have no recourse.
For these reasons, it is extremely important to understand what your claim is truly worth before considering any lump sum settlement.
- Related Article: When Should I Take a Disability Insurance Settlement or Buyout? – Bryant Legal Group PC
Should I Use a Long-Term Disability Buyout Calculator?
Many websites offer a free online calculator to estimate a fair value for your lump sum payout. While such tools can provide a rough and approximate starting point, it is important to understand that the true value of your case cannot be determined by a simple formula.
There are many factors to consider when making this kind of calculation, and the process is not always straightforward. The assumptions, and projections the insurance company makes about your case may be quite different from those considered by the calculator.
As a result, you should always consult with a long-term disability attorney before accepting any settlement offer. An experienced attorney can bring unique insight into how much your claim is truly worth, and can provide you with impartial advice about whether a buyout makes sense for your unique circumstances—and if so, how much the insurance company would need to offer to make it worth your while.
Do Not Be Tempted by Lowball Offers From the Insurance Company
Again, you must remember that the insurance company’s goal with any long-term disability insurance buyout is to save themselves money in the long run. So, you should be cautious about taking their calculations about the true value of your disability case at face value.
For example, almost anyone would agree that the value of money changes over time, due to inflation, investment gains, and interest. Lawyers and financial professionals often refer to this concept as the “present value of money.”
But how much more valuable is it? This is impossible to know for certain, so insurance companies and other professionals use “discount rates” and other metrics to estimate your claim’s present value. Discount rates takes into consideration an estimated rate of return and other factors.
However, insurers make assumptions about which discount rate to use when calculating your lump sum buyout. Do not be surprised if those assumptions are far more favorable to them than they are to you.
Deciding whether to trade your monthly benefits for a lump sum payment may be one of the most significant financial decisions of your life. It may be hard to say no to a one-time check worth hundreds of thousands of dollars, but if you settle for too little, it could mean disaster down the road. A disability lawyer can protect you and help you make a wise decision.
Bryant Legal Group: Helping Disabled Individuals Secure Their Financial Future
At Bryant Legal Group, serving our clients is always our top priority. Our attorneys have decades of experience representing disabled individuals and helped them secure the benefits they deserve, fight unfair denials, and plan for their long-term future.
When you are working through a disability claim, or deciding whether a buyout is the right decision, our experienced attorneys can talk you through your options, weigh the pros and cons, and help you make the right choice for yourself and your family.
Contact a long-term disability attorney in Chicago today by calling 312-667-2536 or completing our online form.