The term long term disability (LTD) insurance “buyout” in Total Disability cases is where the insurance company is paying on the basis of the Total Disability claim. An LTD buyout is a one-time cash payment of all future benefits. So that instead of paying benefits on a monthly basis for the remaining life of the policy, the insurance company makes one lump sum payment.
How the amount of a buyout is calculated
To calculate the amount of the LTD buyout, you take the monthly Total Disability benefit amount, add applicable Cost of Living Adjustments (COLA) and then subtract any appropriate set offs listed in the policy. You then multiply the above monthly benefit times the number of months remaining on the life of the policy. Some policies pay to age 65, others pay lifetime benefits. The total sum of future benefits is then reduced by any legitimate mortality factors based on shortened life expectancy considerations. That total is then further reduced by applying a “discount rate”.
A discount rate is used to factor inflation into the calculation based on assessing the present value of cash being paid out now for benefits that would otherwise not be paid out for months or years to come. In addition to all of the above factors, insurance companies attempt to further reduce the total buy out sum on the basis that except in situations involving bad faith claims denials they are under no legal obligation to provide a lump sum payment. This is correct. However it is an unfair business practice for an insurance company to reduce the actual value of the future benefits to an unreasonable level.
The pros and cons of negotiating a buyout
There are many arguments for and against an LTD buyout, depending on the situation. If a claimant stays on claim, benefits will simply be paid out without deduction for as long as benefits are due. However there is no guarantee that the insurer will not reassess and deny the claim at some point in the future. In fact it is quite common for an insurer to pay for a number of years and then to terminate payments based on “new information.”
As part of its continuing evaluation of the claim, the company will require regular updates of medical, occupational and other information, require that the insured submit to repeated insurance medical examinations (IMEs) and may conduct surveillance or engage in other activities aimed at proving that the claimant is exaggerating or malingering. These actions, can be quite stressful to the insured and many individuals do not want to deal with it.
Once the money is paid out in a lump sum, the buyout becomes an asset of the claimant and his or her family. If disaster should strike causing the claimant’s premature death, the money would pass to heirs. If the benefits were simply being paid out monthly, payments would simply cease upon the insured’s death.
A third reason that some claimants prefer a buyout is that a lump sum payout gives them the ability to invest the proceeds as they may wish.
There are other arguments, pro and con, for seeking a buyout versus staying on claim An insured cannot be too careful in this regard.