Many people who submit long-term disability insurance (LTD) claims find themselves evaluating LTD lump-sum settlement offers. These long-term disability case settlement evaluations may be more common in cases where the individual has appealed an initial claim denial. Weighing the risks and benefits of accepting such an offer can be difficult, especially because insurance companies are not always transparent in how they arrive at their calculations. An LTD buyout assessment guide can help you to identify some of the most common considerations factored into LTD settlement calculations and put you in a stronger position to negotiate for a settlement that will meet your needs.
What Is a Lump Sum Settlement for Long-Term Disability?
A lump-sum settlement for long-term disability is a one-time payment made to settle a disability claim. Rather than paying the policyholder fixed or graduated payments on a regular schedule over a period of time, a lump-sum settlement is usually provided in a single disbursement. However, an installment plan that splits payment into a few separate disbursements can still qualify as a lump-sum settlement if the installments divide a single, agreed-upon “buyout” amount across payments.
The key difference is that a lump-sum settlement, often called a long-term disability “buyout,” is a single, fixed sum, even if it is paid in two or four or even more installments. The more traditional periodic payments for long-term disability are instead guaranteed to continue on the same schedule for a period of time, usually specified in the policy documents. For a long-term disability case settlement evaluation, the significance of this difference is that an individual could end up receiving less or more from a lump-sum arrangement than they would if their disability benefits were paid periodically.
Why Do Long-Term Disability Insurance Companies Offer Buyouts?
Long-term disability insurance providers offer lump-sum settlements for a couple of main reasons:
- Administrative and legal costs
- Estimated total cost of policy benefits
In evaluating LTD lump-sum settlement offers, you will likely wish to think about the same factors insurance companies consider in deciding whether and how much they will include in their offers.
Estimated Total Cost of Policy Benefits
The estimated total cost of policy benefits may be based on such factors as the age of the disabled individual, the maximum duration of benefits specified by the policy, and the insurance adjuster’s assessment of how likely the policyholder is to recover from disability before their benefits expire. Depending on the terms of the specific policy, this expiration date may be a pre-specified length of time after benefits begin, or it may be when the individual becomes eligible for retirement.
Retirement eligibility in an LTD buyout assessment guide most often refers to the age at which the individual would become eligible for Social Security retirement benefits, regardless of whether the person previously qualified for Social Security Disability Benefits (SSDI). Any factor that suggests an individual may recover from disability prior to the close of their benefits eligibility period reduces the insurance company’s estimate of how much periodic payments are likely to cost the company over time. A terminal diagnosis can do the same.
Administrative and Legal Costs
If there is a dispute over a long-term disability claim, an insurance company can sometimes expend significant resources in defending their decision to deny benefits. Even reviewing the materials submitted in support of an appeal takes “manpower,” in the form of hours worked by employees. While the salaries of insurance adjusters are certainly part of an insurance company’s normal operating budget, they face the same cost-benefit considerations as many other businesses in weighing salary costs against achievable workloads. A lump sum settlement ends the cycle of denial, appeal, and review, reducing the administrative overhead associated with a specific claim.
Another factor insurance companies often consider in evaluating lump-sum settlement offers from a cost-savings perspective is the potential for court costs and attorney fees. Not all disabled individuals appealing denied long-term disability claims will file lawsuits, but many do. Policyholders who choose legal action often prefer to work with attorneys to get the benefits of their professional training and experience, but they are not legally required to do so.
Businesses, on the other hand, must either maintain in-house counsel or hire a law firm to represent them in court. Since the primary motivation insurance adjusters have for denying claims is to save their companies money, the more expensive it becomes to defend a denial, the less attractive that continued denial may become.
How Is a Long-Term Disability Buyout Calculated?
Each insurance company will have its own system for calculating the lump-sum settlement offers they make to long-term disability policyholders, so no LTD buyout assessment guide can hope to be truly comprehensive. Nevertheless, there are a few common variables that insurance companies usually take into consideration as they determine whether to make a buyout offer and what amount to propose. These factors typically include:
- The nature of your disability and diagnosis
- The maximum duration of benefits under the terms of your policy
- Any extended benefits that might apply in your case
- The likelihood that you might be able to return to work eventually
- The impact of your disability on life expectancy
- How much the insurance company could expect to pay for your benefits over the life of your policy
Considering the same factors can be helpful in your own calculations as you are evaluating LTD lump-sum settlement offers, and also put you in a stronger position to negotiate your settlement with the insurance company.
Factors To Consider in Evaluating LTD Lump-Sum Settlement Offers
Although the factors insurance companies use to calculate their settlement offers can be helpful to consider in a long-term disability settlement case evaluation, your own priorities are likely to be different from those of the insurance provider. A few questions may help you to identify the factors that are most important to you, to let your LTD buyout assessment guide you toward a wise decision for yourself and your loved ones.
Do You Have Dependents?
If you have dependents, one thing you may wish to consider is that a lump-sum settlement offer can become a financial resource you leave to your family if your condition proves fatal, or if you suffer an untimely accident. Periodic disability payments can vary in their duration, but are not normally paid to survivors in the same way that retirement benefits sometimes are.
What Is Your Prognosis?
If your disabling condition is progressive, or associated with a significant increase in the risk of early mortality, then how your diagnosis impacts life expectancy may be an important factor in evaluating LTD lump-sum settlement offers. A severe prognosis can also make an insurance company less likely to offer a substantial settlement, as the company may anticipate a reduced duration of benefits payments compared to population averages.
What Is Your Overall Health?
In addition to the prognosis for your condition that caused you to file for disability, you may wish to consider your overall state of health. Think about both your total life expectancy and the chances you would likely have to enjoy the benefits of a lump-sum settlement vs. the stability and predictability of regular monthly payments.
What Is the Maximum Duration of LTD Benefits Under Your Policy?
Some long-term disability plans keep paying benefits until the policyholder reaches retirement age. This point is usually defined as the age at which the individual becomes eligible for Social Security retirement benefits, regardless of whether he or she has previously qualified for Social Security Disability Insurance (SSDI). Other plans only pay for a predetermined period of time. Knowing the exact terms of your specific policy is critical to an effective long-term disability case settlement evaluation.
What Other Income Sources Do You Have?
You may be in a stronger position to accept a lump-sum settlement if you have one or more additional sources of income. Because a lump-sum settlement closes eligibility for any future benefits, many people are justifiably cautious in evaluating LTD lump-sum settlement offers. Having other options for bolstering month-to-month income may make accepting an LTD buyout less of a long-term financial risk. Unlike many of the other considerations that may go into a long-term disability settlement case evaluation, this factor is not necessarily shared by the insurance company as they are evaluating LTD lump-sum settlement offers for their own purposes.
What Are the Renewal Requirements for Benefits Under Your Policy?
Many LTD policies require individuals receiving benefits to re-qualify on a regular basis. The medical assessments and documentation requirements needed to support benefits renewal can be onerous. Depending on an individual’s health insurance situation, they can also be expensive. A lump-sum settlement eliminates this obligation and the cycle of uncertainty and anxiety that sometimes comes with it.
Understanding the Present Value of Future Benefits
In calculating their offer to you, a long-term disability insurance company will represent the total amount they anticipate your claim would likely cost the company over time in terms of the “present value of future benefits.” If you are evaluating LTD lump-sum settlement offers, you may also wish to apply the same concept in your long-term disability case settlement evaluation.
“Future benefits” are the estimated total value of all the benefits that would be paid out for a long-term disability claim over the full benefit eligibility period in the absence of a lump-sum settlement. Because the value of the dollar fluctuates over time, estimated cost projections across most industries are made in “present value.” Depending on how economic trends such as inflation and interest rates develop over the months and years following the calculation, the dollar figure quoted might be more or less similar to the benefits actually paid if you reject the buyout, but “present value of future benefits” is a dollar estimate for “what all those benefits would be worth if they were paid today.”
Points To Keep in Mind When Evaluating LTD Lump-Sum Settlement Offers
Letting an LTD buyout assessment guide you toward a decision can be easier when you have a clear sense of your priorities in place. Rejecting a lump-sum settlement usually means betting on your own survival and ability to receive benefits from your policy for years to come. Accepting a one-time payment in your long-term disability case settlement evaluation means acknowledging that the future is always uncertain, and prioritizing the chance to get a definite amount, which you can then spend, save, or invest, as you see fit. Evaluating LTD lump-sum settlement offers is never simple or easy, so take your time, consider seeking professional assistance, and be prepared to negotiate any offers you receive.bligations, personal goals, and emotional well-being. Consulting with financial advisors, legal experts, and family members can provide additional perspectives and help you make a decision that aligns with your personal needs and long-term objectives.
