Underpayment of claims is, sadly, a very common practice. One of the typical methods of underpayment is the purchase of policy benefits by the insurance company. The company will run calculations in order to be able to do offer that as a fairly speedy resolution to the disability claim.
For example, let’s say you have a $20,000 dollar a month disability benefit and that’s worth $240,000 dollars a year. Let’s assume that you’ve got 20 years left on your policy because it’s a lifetime benefit policy and you’re entitled to 20 more years of benefits of because it’s an age 65 policy and you’re only 45 years old when you file your claim. If you multiply that out, that policy is worth $4.8+ million over the life of the policy. It’s a lot of money so you start out with that number and when you’re trying to evaluate what a buyout is worth to a claimant.
Another factor to determine the worth of the policy is whether it includes an annual cost of living adjustment or not, as not all policies do. So if you were to consider a buy out of the policy today, the company would have to pay less cash than the total number if it’s paid out over the course of the next 20 years. If you don’t have a cost of living adjustment in your policy then you have to apply a discount rate to give you the present value of that $4.8 million dollars going out over the next 20 years.
So, you know, our experts know how to calculate this very, very carefully but they don’t always use the same discount rate that the insurance companies use and that’s where the cash out amounts will vary greatly based on the discount rate that is applied. The insurance company will likely argue for a higher discount rate than an appraiser of the policy would apply. That percentage difference can mean a lot of money on the table that is left there by a disabled claimant.
Another way underpayments often occur is the use of an actuarial assessment of your lifespan by the insurance company. The company may take the position that even though the actuary’s numbers indicate that you’re likely to live to age 82, not everybody does due to an unforeseen injury, illness or accident. If that were to happen then your estate would keep the cash payout for the entire time that the company estimated and paid on so a further discount is needed to balance out the possibility that you may not make it to the actuary’s estimated age. It sounds plausible but the very purpose of an actuary is to take into account all of those unforeseen life events across a population segment to give an accurate lifespan estimate, which they do. It is the very heart of their work as actuaries. So the 82 year lifespan in the example is a solid number provided by the actuary that takes into account already what the insurance company demands be discounted a second time. It’s why you have actuaries in the first place. They take into account the members of the pool who will suffer the unforeseen accident, illness of injury and that’s factored in so you don’t factor it in twice. It’s a nice bit of sleight of hand by the company that the claimant needs to be aware of.
Another way to present an underpayment to a claimant is the offer of an upfront pool of investment cash to be used by the claimant however he/she sees fit. So, in essence, because the opportunity of receiving a large sum of money in one fell swoop is a great opportunity, the insurance company may present the need to further discount the amount because the receipt of a large a lump sum is a benefit in and of itself and they are not compelled to offer a lump sum payment, which is true. This position conveniently forgets that you are entitled to the policy benefits and have paid dearly for them over the course of many years. The reality is that people filing a disability claim are often under immediate financial pressure to support themselves and loved ones and meet their financial obligations. and that provides the insurance company with leverage to negotiate a discounted cash out amount.