Disability Insurance Claim Advice
Monthly DI Benefits Versus a Lump Sum Settlement
Broker Wrold, March 2006
By Art Fries
Disability insurance companies sometimes offer a “settlement” in the form of a buy-out. Rather than pay a monthly benefit for what may be many years, they offer a lump sum settlement in the form of a single check. If the policyowner agrees to the settlement, he gives up his disability policy to the insurance company and they no longer pay him a monthly benefit.
For some individuals a buy-out makes a lot of sense. They may need tuition money for college-age children, have an opportunity to take advantage of a financial investment, or just prefer the opportunity of no longer having to deal with claim forms, progress reports and attending physician statements. Not having to deal with the apprehension of knowing whether a claim will be continued, as well as the harassing tactics used by some insurance companies, can also be reasons to consider a buy-out. For some, holding onto their policies and, hopefully, continuing to get paid on a monthly basis for the length of the benefit period is best.
Some disability carriers (or administrators) approach disabled policyowners, some can be approached by policyowners, while others don’t like the buy-out approach at all.
Some carriers provide an initial offer that is fair and based on sound actuarial principals, and they don’t like to deviate from their initial offer. Others like to “low ball” the initial offer and see if they can pay the lowest possible figure. One such company likes to send two home office staff members to policyownwer’s residences, indicating they would like to complete a buyout, but offering only 10 or 12 cents on the dollar. Furthermore, they threaten with additional independent medical evaluations or functional capacity evaluations, in which a physical therapist inflicts “pain” in the areas that hurt the most. Some policyowners are asked to have another neuropsychological or psychiatric exam, or both. In addition, video surveillance has been used, making policyownsers think they will never stop being watched.
Often insurance companies open negotiations for a buy-out with a request that policyowners provide a figure. The response at that point could be a crucial aspect of the buy-out process. An offer should always be secured in writing. In an offer letter, insurance companies usually start out with the figure they are prepared to pay and then talk about the present value of anticipated future benefits. What they sometimes neglect to mention is the future potential benefit (how much the monthly benefit is worth….say, to age 65 or life expectancy). The present value takes into consideration the insurance company reserves and a discount factor is applied that represents unearned interest for future years. Not knowing what the future potential benefit is makes it harder to figure out what a claim is worth.
If a cost of living adjustment (COLA) benefit is included in a policy, it should be factored in when considering a buy-out. A COLA benefit might be paid on the basis of simple or compound interest, and it is important to know which interest factor is being applied. Almost all COLA benefits level out at age 65 and then, if it is a lifetime payout, continue at the level amount for life. On some rare occasions I’ve seen COLA benefits that do not level out at age 65 but continue to increase for life.
Residual (partial disability) benefits are paid to age 65 with every company except one in which the partial disability benefit is continued for life (in a contract that pays total disability benefits for life). Again, partial disability benefits should be considered in calculations for a buy-out. However, I have seen cases in which future potential benefits have been reduced to the present value with an interest factor applied. In some cases, an additional reduction is made for mortality (when the insurance company thinks you will die) and a morbidity factor (if the insurance company thinks you have a potential for coming back to work). Finally, in some cases further discounts are applied to give an insurance company a profit margin. The lower the offer, the higher the profit margin.
An actuary experienced in disability claims should be consulted. Finding an actuary in this area may be difficult since those currently working for insurance companies are usually not available to claimants. However, they can be found, and they can make a difference in the numbers. CPAs are sometimes involved, but I find they typically lack the required background/experience in this “niche” area. Attorneys will sometimes offer to represent you in a buy-out; however, when a contingency fee is charged, it is often at a very high percentage not reflective of the minimum amount of time involved in the process.
A disability claims consultant who has handled many disability claims and is familiar with the negotiation process can provide assistance in lessening anxiety levels. Generally the fees charged are reasonable.
There are many reasons to consider a buy-out and all are unique to each client’s situation. A buy-out offer can involve a good deal of money. This is not an area in which someone should be “shooting form the hip.” Proper care and consideration in aiming is what gets to the “bulls-eye.”