Many claimants wonder if they will receive a lump sum settlement in their long-term disability insurance case.
Two of the most common circumstances under which a disability insurance company will initiate a lump sum settlement offer in a private disability or group long term disability case are:
- If the claimant has a chronic condition that won’t improve and they have already paid them for several months or even years.
- While a lawsuit is ongoing so they can completely settle your claim without reinstating disability insurance benefits
A lump-sum settlement includes any past-due benefits the insurance company owes the claimant (sometimes there aren’t any), as well as a portion of the future benefits they are entitled to receive. Often these settlements are called buyouts, washout settlements, or walk away settlements, as the claim ends once the claimant agrees to a long-term disability settlement offer and receives it. All parties walk away knowing that no future benefits are involved.
How do you know if a long-term disability settlement is right for you? There are many factors to look at; however, your best advice will likely be from an experienced long-term disability attorney familiar with all of them.
Use Our Calculator to Determine the Present Lump Sum Value of Your Long Term Disability Benefits
Our Long-Term Disability Payout Calculator can provide a baseline evaluation of your claim that you can compare to a settlement your insurer offers you.
Understanding Present Value Versus the Time Value of Money
Suppose the disability insurance company owed you $100 now. You deposit it at your savings bank, and it matures over time to be worth over $100 since you can earn interest on it. This is an example of the time value of money. It’s critical to understand that $100 now will be more valuable than receiving it next month or next year. This is possible due to interest.
However, the opposite can also be true. For example, the value of $100 next month or next year is less than what $100 is worth now. So you lose time to earn interest on that sum. The current value of money you get in the future has to account for the interest you will have to earn to equal the amount owed to you in the future.
For example, present value is what allows $20 million lottery winners to choose between:
- $1 million each year for 20 years, or
- $6 million to $7 million now
The winner can earn interest on that lump payment. After 20 years, it can grow to the same $20 million they would have received if they took the $1 million every year for 20 years straight.
Financial experts use present value calculations to show the time value of money. The calculation shows the sum of money you will need to get now, assuming a reasonable interest rate, to equal a certain sum in the future. For instance, the disability insurance carrier owes you $100 in 12 months. Suppose they give you $100 now.
However, you can earn interest on it, which can add up to more than $100 over 12 months. In that case, the time value of money tells us that a smaller sum, perhaps $95, will be what they would have to pay you today to amount to $100 a year from now.
To determine the total value of your claim, you must use this calculation for your future long-term disability insurance payments. Understanding this concept is crucial as you can’t determine the present value of your future payments unless you realize how much money is at stake. Adding all future payments together will inflate how much your claim is worth due to the time value of money.
Without a financial background and experience in making this type of calculation, it’s in your best interest to consult with an attorney to ensure this calculation is accurate. Don’t make any decisions or formal agreements until you do. This is just one piece of the puzzle in knowing if a settlement is a good or bad idea in your specific case.
Different Discount Rates
You should also note that your disability insurance carrier won’t use the same discount rate that you use when they perform their calculations. As such, their present value will likely be lower than the one you reach.
Long-term disability insurance companies typically use a corporate bond index, not the U.S. Treasury rate, to calculate their interest factor. You should anticipate that insurers’ accountants will use the highest interest rate. Why? Unfortunately, because this means the lowest present value for your claim
Under their guidelines and provisions, if you can earn more interest on your settlement in the future, you don’t need to get as much money now. Often, this can mean the insurance company is negotiating with tens of thousands of dollars less than if they had used a different rate in their calculations. It’s something to keep in mind when considering a lump sum payment. A lump-sum buyout settlement may not be right for you.
Offered a Settlement While Receiving Monthly Benefits? Consider These Factors
Suppose you are receiving monthly disability benefits, and the insurance company doesn’t think it’s likely that you will return to work. In that case, you are prime in their eyes for a settlement offer. Disability insurance companies usually reserve settlement offers for individuals receiving monthly disability benefits, known as “on a claim,” if they don’t expect the claimant to return to work.
On-claim individuals have the strongest case and the highest bargaining chip. Why? The insurance company has accepted them as disabled. For a disability claim representative to concur that you are, in fact disabled, and for the company to have already paid you for some time, your case must have clear and convincing evidence.
You should also consider:
- Your physical and medical condition as it will determine how much a lump sum offer may be. Insurers will readily accept some conditions as permanent but view others as temporary.
- If the condition you filed for disability is terminal, it will influence the sum your insurer will offer. For example, someone with end-stage cancer who has only months to live will not likely receive a settlement offer in an amount covering several years of benefits. However, the insurance company won’t offer more benefits than the duration for which they believe you will live.
- Suppose you receive a lump sum settlement while on-claim. In that case, you will be accepting less money upfront (although it’s guaranteed) instead of receiving more money over time. Disability insurance companies offer a percentage of their claimants’ future benefits. They won’t pay 100 percent of the money they owe you in the future. It makes more financial sense for them to hold onto their money, earn interest on it, and send you a check each month. They calculate a settlement amount that makes financial sense for them—one that will allow them to make money by getting you to accept the settlement.
You have the right to ask questions. You can ask them to show you how they calculated the settlement offer or why they are offering a settlement. You can also ask them how long they think your disability will last. Having as much information as possible will allow you to make an informed decision as to whether accepting their settlement offer benefits you or not.
Be aware that you aren’t required to agree to a settlement offer. You are under no obligation to accept their offer at all. If you don’t feel like it’s a good move for you or your attorney or financial advisor has told you it’s not wise, stand firm in your decision. Once you accept the offer, you can’t go back and change your mind at a later date.
What Should You Settle Your Lump Sum Disability Case For?
The answer is extremely specific from one case to the next and depends on many variables. First, consider the facts of your case and the state and federal district that governs it. For those who are on claim and currently receiving monthly disability benefits, disability companies frequently offer a settlement equal to between 50 and 70 percent of the current value of their future disability payments owed to them. Remember that those who are on claim have the strongest cases. It’s often not in their best interest to accept a lump settlement, although their insurers may try to pressure them into doing so.
In these cases, you need a law firm that isn’t a settlement mill with attorneys who won’t push their long-term disability claimants to settle. You may best maximize your disability insurance benefits by requiring the insurance company to pay you until you reach 65 or the termination age for your disability benefits.
If you are in the middle of a lawsuit against your long-term disability insurance carrier, depending on where you reside, some disability insurers offer claimants as little as 15 percent of the present value of your claim. Other claimants might receive offers as high as 60 or 70 percent of their current value. Be aware that claimants won’t receive these benefits during an ongoing lawsuit.
Some claimants might garner some bargaining power if they filed a pre-suit appeal or with the help of the law of the jurisdiction where their case is pending. An experienced disability attorney can advise you as you go through the settlement process, keeping the specifics of your case in mind.
What Determines if You Win or Lose Your Disability Case?
If you receive a settlement offer for your long-term disability claim, be sure to ask your disability claim lawyer questions so that you understand the offer you receive. In addition, you should understand all of the potential outcomes of deciding to accept the settlement or not.
The following factors will often determine whether a disability claimant wins or losses in court:
- The strength of the evidence
- ERISA laws
- The standard of review used by the court—can they submit additional evidence, or are they limited to the pre-suit claim file (the latter is likely)?
- If the disability insurance carrier sent you to their physician, does that affect your case?
- Did your doctors thoroughly document your disability, limitations, and restrictions, not just your diagnosis and symptoms?
- Will your case go before a judge or jury? If a judge, what is your lawyer’s opinion of the judge’s past disability claim rulings compared to your case?
- If you didn’t hire a lawyer to manage your ERISA appeal, did you help or hurt your case?
- Are there other factors that weigh in favor of or against your case?
As the claimant and client, you get to make the final decision as to whether or not to settle your case.
Non-Legal Reasons to Consider a Long Term Disability Settlement Offer
It’s a lawyer’s job to advise their clients about how the facts of their case look under the law. Even still, there are many factors outside the law that you will want to account for when deciding if you will accept a settlement offer or not. Sometimes, it’s not all about the law.
Consider the answers to these questions:
- Is it difficult to deal with the insurance company and its forms?
- Are you facing financial pressures that might require you to accept a settlement?
- Is the stress of handling your claim becoming too much?
- Are you experiencing family pressure or anxiety from the disability insurance company’s actions?
- Do you want to fight the insurance company over matters of principle even if it costs you money out of pocket?
- Are you prepared to dig in for a long battle in court?
- If you win, can you deal with the insurance company appealing?
- What if you lose your case and don’t receive any monetary compensation for your disability?
Even though these factors aren’t directly related to the strength of your case, they are legitimate factors for you to consider. Understand that these depend on your feelings and knowledge at the time of your decision. No legal advice can explain how these should impact your decision, but you should still consider them.
However, having the guidance and advice of a trusted attorney during this time can make deciding whether or not to accept a settlement much easier.
Following graduation from Loyola Law School in New Orleans in 1990, Price McNamara served as a Federal Judicial Law Clerk to the Honorable John M Shaw, Chief Judge, United States District Court Western District of Louisiana.
Mr. McNamara founded J. Price McNamara ERISA Insurance Claim Attorney, and began putting his past experience to work for the injured and disabled clients he now represents against the insurance companies in personal injury and long term disability and other insurance disputes in both federal and state courts