When a disability insurance company pays monthly benefits to an insured individual, it is losing money. One strategy used by these companies to cut losses is to buy out the insured individual’s disability policy in return for a one-time lump sum amount.
Reasons to consider a lump sum policy buyout
If you have been receiving long term disability benefits, you might want the security of knowing that benefits will not be taken away further down the line by an arbitrary decision of the insurance company. Individuals, who have had a bad experience with their insurance carrier and don’t want to risk losing their benefits, may find the buyout option very attractive.
Another good reason is that, in most LTD policies, there are no rights to survivorship. If the insured passes away, his or her heirs will not receive any benefits. A lump sum payment guarantees that the deceased’s survivors will continue to get some income.
How does an insurance company calculate a buyout?
Every insurance company has its own formula and valuation method for determining the value of a disability insurance policy. The common factors considered include:
- Your life expectancy and mortality
- The corporate bond rate as it exists currently
- The amount of insurance reserved for the particular policy
- The likelihood that you will remain partially or completely disabled
- The present value of your future monthly disability benefits
During a lump sum buyout, insurance companies make an offer discounted to the present value, not the future value. For instance, consider that the future value of your disability payments –at $4,000 a month for ten years (a total of 120 months)– is $480,000. Then the present value is the money that you need today at the stated interest rate, to get $480,000 ten years from today. As you can see, a buyout doesn’t give you 100 percent of the present value. Insurance companies don’t consider it financially viable to payout 100% of the future value in a buyout. Obviously, this is all very complicated. At RamosLaw, we will work with your financial advisor or with an actuarial consultant to get to a figure that is accurate and fair to your particular situation.
For a free consultation with a Connecticut or Massachusetts Long Term Disability Lawyer, you can contact us or call toll free (855) 946-7266.