| MONTHLY
DI BENFIT VERSUS A LUMP SUM SETTLEMENT
BROKER
WORLD MARCH 2006
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.”
Art Fries is a disability claim consultant providing advice
on a national basis. He is located in Newport Beach, CA,
and can be reached by telephone at 1-800-567-1911 or www.afries.com.
_____________________________________________________________
Art
Fries is a longtime NAHU member, a DI producer and a professional
disability claim consultant providing advice nationwide.
Art sold his first DI policy to himself in 1963. He provides
advice on a national basis and welcomes questions or comments
to his column. He can be reached at 800-567-1911 or through
www.afries.com
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