If you are receiving long-term disability payments from your insurance company based on the provisions of your policy, the company may attempt to buy out your policy by offering you a lump sum settlement payment now in exchange for your policy. Alternatively, the company may attempt to buy out your claim by the same methodology.
While the latter happens rarely, the former happens quite frequently. In either case, the company doesn’t want to remain “on the hook” for its long-term disability payments any longer than it has to. The more money it pays you over time, the greater its losses. Therefore, the buyout offer is the company’s attempt to cut its losses by considering a number of factors, the two most important of which are the following:
- Mortality – the likelihood that you will live to the maximum benefit period payable under your policy
- Morbidity – the likelihood that you will recover before you reach the maximum benefit period
You can calculate your insurance company’s maximum exposure quite easily. For instance, assume you currently are 50 years old and your long-term disability benefits pay you $5,000 a month until you turn 65. That represents $60,000 a year for 15 years, or a total of $900,000 maximum exposure for your insurance company, assuming you remain disabled throughout this 15-year period.
Don’t assume, however, that you’ll receive a buyout offer of $900,000. You won’t. Instead, the company will calculate the present value of the settlement it offers you now; i.e., the amount of money (substantially below $900,000) it must pay you so that, when you deposit it, it will accumulate interest that will allow you to continue drawing out $5,000 a month until you turn 65. Determining the present value of money is a complicated procedure based on interest rates, and different companies use different interest rates in their calculations. In addition, the present value figure they arrive at is only their starting point when determining how much money they will offer you as a lump sum.
Unless your policy specifically provides for a buyout, your insurance company is not legally obligated to offer you one. Some companies, such as Guardian and Northwestern Mutual, traditionally have not done so, while others, such as Unum, have traditionally used this practice when they think it’s to their advantage.
If your company does buyouts, be aware of these three things:
- They are voluntary, extra-contractual arrangements between two willing parties – you and the insurance company, not ordinarily required by the insurance policy.
- You are not obligated to accept a lump sum buyout from your company.
- You have the right to make a lump sum buyout proposal to your company.
Whether or not a lump sum buyout is in your best interests takes careful thinking, calculating and planning on your part. You likely will require help from a knowledgeable and experienced attorney in order to make the best decision based on all the circumstances of your current situation and expected future circumstances.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack