Suppose you are disabled and receiving disability benefits from a long-term disability (LTD) insurance policy. In that case, there is a chance your insurance company will offer you a buy-out. If your insurance company offers you a buy-out, you may have many questions, like: Why did this happen? What does this mean? Do I need to accept? Should I accept? If I do not accept, will it impact my benefits?
Let’s explore some of these topics. If you want a more detailed evaluation of your situation, give Kantor & Kantor a call for a free assessment. We frequently help people receive the best buy-out possible.
What is a buy-out?
This is what we call the situation when your disability insurance company is paying your claim monthly but decides to offer you a single lump sum amount in exchange for no longer paying you monthly. If you accept, you will no longer need to provide evidence of your disability, no longer provide medical records or attending physician statements, and will receive the agreed-upon buy-out amount.
However, you will no longer receive monthly benefits, and the lump sum amount will be some smaller fraction of the total amount of your monthly benefits if you remain on the claim.
Why did I receive a buy-out offer?
Insurance companies do not explain why they chose you to do a buy-out offer or why this happened when it did. It seems random. Of course, it is not random. The insurance company made a proactive decision about ways to optimize their profits, and your claim fits their algorithm.
Do I need to accept?
No, you are not required to accept.
Should I accept?
This is the critical question. It is also one that you can only answer after considering your specific situation. You must balance the amount offered against your global financial picture. It would be best if you considered tax ramifications. It would help if you considered your medical conditions, whether there is any potential you will be able to return to work, and also whether they may limit your lifespan.
You will want to think about what you can do with a lump sum amount that you cannot do with a monthly benefit. These considerations, and many more, are critical to making a wise decision about your future and accepting a buy-out.
If I reject the offer, will it impact my benefits?
The insurance company’s answer is “no.” Our experience is not so clear-cut. We have seen many people reject buy-out offers and continue on claim as if no buy-out offer was ever made. Nevertheless, what cannot be ignored is that we have also seen many people whose claim has entered escalated claims handling after a buy-out offer was rejected.
This alone does not mean the monthly benefits will be terminated—but it does make it more likely to happen. Our advice, be prepared for more scrutiny on your claim if you decline a buy-out offer.
How was the buy-out amount calculated?
Sometimes the insurance company will explain precisely how it calculated the lump sum number being offered. Other times they do not. Regardless, the lump sum number is some fraction of the potential total value of your claim in present-day dollars. This means the insurance company calculates your monthly benefit, multiplies that by the maximum potential time those benefits may be paid, and then reduces this figure by some present value discount rate. Our recent experience (in 2022) shows the discount rate is between 3%-6%.
If you have a lot of time left until you reach the maximum benefit period on your claim, the present value deduction can be pretty significant. However, the present value discount is not a reduction in your benefit, but rather a way to value every potential dollar in your claim based on the value of money today. After all, would you rather have one dollar today or one dollar ten years from now? You’d rather have the one dollar today because it is worth more than the dollar ten years from now. Even if it is not, you can always hold onto that dollar and spend it in ten years if you’d like.
The actual reduction in your buy-out offer comes from mortality and morbidity rates. Insurance companies employ actuaries they claim can determine the chance you will recover or die before the maximum benefit period on your claim. The actuaries rely upon large amounts of data that may or may not apply to you. The insurance company will try to cloak this factor in secrecy. However, it is one of the two primary ways they receive a benefit by offering you a lump sum settlement.
The other way insurance companies profit through a lump sum buy-out is a simple reduction. Suppose it calculates your claim as worth $10 after accounting for present value and mortality and morbidity. In that case, it may offer you $5 for a settlement. This may seem unfair, and in some respects, it is. Nevertheless, you don’t need to accept. Also, it may present an opportunity for a skilled negotiator to increase the settlement offer.
Many other items can factor into your decision to accept or reject a lump sum buy-out offer. There may be a reasonable number you are willing to resolve your claim for, but you don’t know what it is or how to get there. Kantor & Kantor may be able to assist you with this process. Give us a call and find out for free. We Can Help.