I represent individuals with long term disability insurance claims, which means I fight insurance companies that deny my clients long term disability insurance benefits. I also work with individuals whose long term disability claims have been approved and have been offered a lump sum disability settlement. A lump sum disability settlement is where an insurance company pays an entire long term disability benefit immediately with one check, instead of at a regular interval (usually monthly) over time. Receiving a lump sum payment has advantages and disadvantages, and determining the proper value for the lump sum typically involves bargaining between a client and their insurance company.
If you have been offered a lump sum disability settlement, there are several things that you should know before deciding whether to accept the offer. The long term disability insurance company has already calculated what it believes your claim is worth. Not surprisingly, this calculation was done with the insurance company’s best interests in mind. To get a better handle what your benefit might be worth, consider the following five key factors to valuing your lump sum settlement.
1. The Present Value of Your Long Term Disability Insurance Benefit
In suggesting a lump sum disability settlement, the insurance company is offering to pay the present-day value of all your future monthly disability benefits. This calculation provides the insurance company with a discount for paying you a lump sum settlement today, as opposed to paying out monthly benefits over the course of time. If you were to receive payments over time, future payments of the same amount would be worth less due to inflation. Further, because you have access to this lump sum settlement today, you potentially could invest it and earn interest on the money. By paying the money out now, the insurance company has lost the ability to earn interest on it. For these reasons, your lump sum disability settlement must be reduced to its “present value.” As such, the future stream of disability benefits must be reduced to “present value.”
The interest rate used for this calculation is an important factor in determining the value of your lump sum settlement. This interest rate represents the interest you could potentially earn on the settlement amount. In today’s financial climate, an interest rate between 3% and 5% is generally accepted as reasonable.
2. Mortality Tables
Another important factor used to determine the value of your lump sum settlement is your life expectancy. Long term disability insurance benefits are typically paid until age 65 or your Social Security Normal Retirement Age. Depending on your age and health conditions, there is always a chance you may not survive for the full period of your benefit claim. Insurance companies will try to take advantage of this fact when negotiating with you. It is important to know if your disabling condition is likely to have an impact on your life expectancy; you can discuss this with your physician. In negotiating with the insurance company, it may also be relevant to discuss how long your relatives have lived, as this may provide a window into your own lifespan.
Considering the tax implications of your lump sum settlement is also important. Whether you are required to pay taxes on your long term disability benefits is based largely on who paid for the insurance premium. If you paid for the premium with “after tax dollars” then the long term disability benefits are generally tax-free. If your employer paid for the insurance premium or you paid for it with “pre-tax dollars” then the benefit is generally taxable at regular income tax rates. If your benefits are taxable, receiving a lump sum settlement may lead to negative tax consequences, as it would be taxed at a higher rate than if you received the benefit over time. Structuring your settlement to consider the tax consequences is important.
4. Cost of Living Adjustment
Does your plan include a cost of living adjustment? If it does, this needs to be considered in calculating the value of your lump sum settlement value. A cost of living adjustment typically increases the value of your benefits by a set rate every year, and this increase can greatly offset any present value reduction.
5. Ending the Relationship With the Insurance Company
Finally, there is usually a value in permanently ending your relationship with the insurance company. When you accept a lump sum disability settlement, you are ending what is often a toxic relationship. You are also eliminating the very real possibility that the insurance company will cut off your benefits in the future, forcing you into a protracted fight to recover what you are owed.
So, what is a fair lump sum settlement amount? That depends on the facts of your case. If your claim has already been denied and is in litigation, the insurance company has many advantages under the law. If your claim has not been denied, a settlement offer between 50% and 80% of the present value of the claim is typical. If you would like to discuss the specifics of your situation with an experienced long term disability insurance attorney, please contact Hawks Quindel for a free case evaluation.
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