If your long-term disability insurance claim has been approved, you are receiving monthly benefits provided under the terms of your policy. Monthly disability benefits usually are provided either to age 65 or lifetime. Some claimants prefer to accelerate those payments and receive a lump sum buyout rather than monthly checks. This procedure requires calculating the present value of future benefits. The calculation of the present value of future benefits is a complicated process. It involves not simply multiplying the dollar amount of monthly benefits by the number of months involved, but also involves issues relating to mortality, discount rates and other factors that can make a very substantial difference in the buyout calculation.
Let’s say you are 55 years old, receiving monthly checks for $5,000 from your disability insurer. Let’s also assume that your disability insurance coverage expires when you turn 65. In this scenario, people often jump to the conclusion that the insured would be entitled to receive $600,000 today, rather than $5,000 every month for 10 years. Unfortunately, that is not correct. First, the $600,000 payment would have to be reduced to its present value. This is because the present value of future benefits is worth less in today’s dollars than the sum of the benefits, due to inflation. An experienced disability lawyer understands how to take inflation in to account in calculating present value. Insurance companies often calculate a lower present value than the insured, or their experts. In other words, the insurance company usually uses a higher present value discount rate than the insured. This is one of the important parts of a buyout negotiation.
A second point of contention has to do with mortality. Insurance companies will argue that most insureds will not live long enough to receive all of the potential benefits payable. Medical testimony is often used to substantiate or refute mortality numbers.
A third element in calculating a buyout has to do with good old-fashioned leverage. If a buyout is being calculated purely at the request of the insured, then the insurance company is in a strong bargaining position with respect to its calculation of present value. This is because the insurance company has no obligation under the terms of its policy to offer a buyout. The insurer will insist on using discount rates and mortality calculations that favor the insurer. In such a situation, the insurance company can basically disregard the opinions of the insured’s experts.
Considerations – Long Term Disability Buyout Options
However, if the reason for a present value calculation is not simply a request by the policyholder for a buyout, but rather is due to an allegation of unfair claims handling practices by the insurance company, then the insurer cannot ignore the claimant’s experts. The reason is because if the case goes to trial, a jury is much more likely to accept the opinion of the insured’s experts than it is to disregard those opinions.
The attorneys at Ray Bourhis Associates are experienced in handling present value calculations of future benefits, and in negotiating buyouts. You cannot be too cautious in running these calculations. Even a slight difference in the discount rate and mortality assumptions can add-up to high six-and-seven-figure differences in the ultimate buyout.
Matthew Bourhis is an attorney at Ray Bourhis Associates. He specializes in Long-Term Disability Insurance, Bad Faith, Homeowners Insurance and Business Insurance.