Lump sum buyouts of long-term disability policies can happen at any particular time during the course of a claim.
Claimants need to know that there are opportunities available with some companies, but not with others, to receive buyouts.
•There are some long-term disability insurance companies who buy out claimants just to get them off the books, rather than continuing to pay their benefits.
•There are some companies who will buy out a disputed, denied or terminated claim before a lawsuit is filed.
•There are some companies who will buy out claims only after a lawsuit is filed, but before the lawsuit moves forward very far.
•And there are some companies who will only consider a buyout after a lawsuit has been filed and the case has been litigated for a while.
It’s going to vary significantly from company to company, but it’s something that a claimant should always be thinking about or discussing with their counsel.
Let’s start with the first one, disability buyouts when someone is on-claim, being paid. When someone is on-claim, being paid, and the insurance is not disputing that they’re totally disabled, there are times when certain companies that no longer sell these products may look to get these claimants off the books. The company will contact your lawyer or contact you, and do one of two things: ask whether you’re interested in a buyout or just actually offer a dollar amount with an explanation.
When that happens, the first thing your lawyer needs to do is determine the value of the benefits that you’re entitled to receive on your long-term disability policy. That means someone has to analyze how much longer you’re entitled to be paid and how much money that amounts to.
In addition, if your benefits are payable either to age 65, for life, or somewhere in between, the evaluation of how long you’re going to live has to also be included in that analysis. This can be a factor if you have a disabling condition that an insurance company, or the health care profession in general, believes might affect you reaching a certain age. Not surprisingly, this is called a mortality rating.
The other factor that insurance companies consider is the possibility that you could return to work in the future, known as a morbidity rating.
Insurance companies always evaluate mortality and morbidity when they are considering and/or making a buyout offer.
I’ll use a perfect example of how insurance companies rate benefits based on mortality: If someone has a mental illness, and the basis of their long-term care disability claim is a form of mental illness (whether it’s depression, bipolar disorder, or some other form of psychiatric disability), the insurance companies will always reduce for mortality the amount of a future benefit calculation, based on a belief that people with mental illness are not going to live as long as people without mental illness.
Insurance companies manipulate these numbers in multiple ways. A sophisticated lawyer in this area needs to understand how the numbers work and how they get manipulated. In addition, no matter what kind of claim you have, the insurance company, because they’re paying you into the future, is going to reduce your benefits to present value. This means that, because a lump sum buyout gets you money that the insurance company would be paying you into the future, now, that lump sum gets reduced by an interest rate that factors in the growth of that money over the period of years the insurance company otherwise would have paid you. For you and your lawyer to properly assess this, you have to know what interest factor (or discount rate) is being used, whether it’s reasonable, and how much it changes the present value of those future benefits. At the end of the day, whether it’s in claim, right before you start a lawsuit, at the start of the lawsuit, in the middle of the lawsuit, or even after a trial, sophisticated counsel needs to understand how these numbers work, to determine whether or not the lump sum buyout that you have the opportunity to receive is fair and reasonable. If you have any questions concerning a lump sum buyout of a long-term disability policy, don’t hesitate to contact us.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack