{3:40 minutes to read} A “buyout” occurs when an insurance company gives the insured a lump sum of money in exchange for either the claim or the policy.
An insurance company buying out a long-term disability policy happens somewhat frequently. On the other hand, the buying out of a claim is an infrequent occurrence, but it can happen. No insurance company is legally obligated to buy you out for a lump sum, unless it’s provided for in your policy. You should also know that you don’t have to accept a buyout from the insurance company. A buyout is an extra-contractual arrangement, a voluntary decision by both you and the insurance company that isn’t ordinarily required by the policy.
Most of the time the maximum exposure – the sum of your monthly benefits over the length of time payable under your policy – is easy to calculate.
For example: If you are 50 and have a benefit that pays $5,000 a month until age 65, then you basically have an annual $60,000 payable for 15 years, or $900,000 of total future benefits (assuming you remain disabled under the policy through the maximum benefit period of 65). However, settlements are not based on maximum exposure. If an insurance company pays you a lump sum today, that lump sum will be calculated as the present value of future benefits. The present value of future benefits is determined by calculating the amount which, once deposited, would accumulate interest and continue to allow you to withdraw your $5,000 a month until you turn 65. Different companies use different interest rates to identify the present value of your future benefits. It is this present value number that the insurance companies use as a starting point to determine how much money they will offer you as a lump sum.
Many factors go into the insurance company’s evaluation of a lump sum settlement offer, but two main considerations are:
- Mortality – whether the insured will live to the maximum benefit period payable under the policy; and
- Morbidity – the likelihood that the insured will recover before they reach the maximum benefit period.
Insurance companies attempt to determine whether you will recover or die before you reach the maximum benefit period in your policy. This directly affects the lump sum they will be willing to pay, if any, should they wish to attempt to settle with you for a lump sum. Some insurance companies do not voluntarily buy out existing claims.
Knowing if your insurance company offers lump-sum buyouts may determine whether you want to approach them with a buyout proposal. Guardian and Northwestern Mutual are examples of companies that do not ordinarily buy clients out of their insurance policies, while companies like Unum will buy out policies voluntarily.
While there are a number of factors you need to consider when deciding whether or not you can get a lump sum insurance buyout, if the company won’t consider it, there is very little you can do about it.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack
833-824-5350
[email protected]