Buyouts are rarely in the best interests of you, the insured, and will always result in a windfall for the carrier. That being said, there are legitimate reasons to take a buyout.
If you have such a reason, you may wonder how your insurance company arrives at a buyout number when it tries to buy out your long term disability benefits claim.
The procedure is somewhat complicated, but to protect your interests in such a negotiation, you have to have some insight into how the process works.
First of all you have to understand what a buyout is. The insurance company gives you a lump sum, thereby doing away with its future monthly benefit payment obligation to you, which otherwise may have stretched for many years. The insurer doesn’t have to buy you out, so it will only offer to do so if it receives some benefit from the buyout deal.
Make no mistake, the charitable urge is no part of the insurance company makeup.
Basically insurance companies make buyout offers to save money. Every disability claim has a “present value”. This is the amount of money you could invest now, at a certain interest rate, so as to have, at the end of the benefits term, the same amount of money the company would have paid you in benefits. Obviously, the higher the interest rate used to calculate present value, the smaller the lump sum buyout offer has to be.
By paying early the company saves money and frees up the reserve set aside to pay your claim, so the insurer can use that reserve money now. It also removes the claim as a liability on its books.
Insurance companies rarely feel a pressing need for money. But for many policyholders like you, it’s another story, especially disability beneficiaries who can’t work, but still have to take care of their families. You may need funds to educate a child, keep a mortgage going, or fund treatment for an illness or injury subsequent to your disability.
When you do, a benefits buyout may be an attractive solution to your problem. And if the insurance company gets a whiff of your pressing need, they’ll push their advantage to the limit.
Insurers will try to bargain down the “present value” in various ways:
• They will try to sell you on agreeing to an interest rate which is higher than the rate you are able to get on a reasonable investment. As mentioned above, the higher the rate, the lower the “present value” needed to match the amount of money you would receive over the term of your present benefit payout.
• They will want a discount if there is any chance at all of you being able to go back to work before your present benefits payments are paid in full.
• They would also want a discount because of the chance you might die before your present benefits payments are paid in full. Death ends disability payments.
• And then there is the arbitrary rule that insurers impose: They will never pay more than a certain percentage of the “present value” amount agreed upon with you. This percentage varies from insurer to insurer.
Dealing with these variables is the essence of coming up with a fair buyout figure. Expect no sympathy from the insurer. It will be strictly a business deal.
The thing you have to watch out for is that the insurance company doesn’t give you “the business”.