What Is a Disability Buyout?
Not every insurance company will offer to buy out a long-term disability policy that is already paying monthly benefits, but all insurance companies are constantly monitoring what they call their exposure. Exposure means current and future obligations—how much in cash payouts they’re going to be liable for.
They use actuaries and medical advisers to review every policy decision, and when it comes to LTD plans, they may decide that it’s in their best interest to close out their long-term commitments.
Doing so generally means they’ve decided that it’s cheaper to buy out a policy than continue making monthly payouts. This also generally means they’re probably going to offer you—at least initially—a lower lump sum than what it would cost them to continue the benefits.
Reasons to Accept a Buyout
If, say, you’re receiving $3,000 a month in disability benefits until you reach age 65 and you’re currently 55, that means you’re owed at least $360,000—10 years multiplied by $36,000 a year. There are several variables involved, however.
One is inflation. That $3,000 in 10 years might be worth only $2,500 after the ravages of inflation. Does your policy include a cost-of-living-adjustment (COLA) rider? If so, and the insurer offers you $325,000 in a buyout, you’ll be losing money. If you have no COLA, accepting the money and investing it wisely might actually mean you can do better in hedging against inflation.
There are other benefits to accepting a buyout that pertain less to the cash involved, and these relate to how the insurance company currently treats you while you’re out on disability.
First, you may have jumped through all the initial hoops in being approved for your disability benefits, but insurers don’t always just stop there. They are known to order periodic medical examinations, requests for medical records, and even make field visits. If they can find evidence that you have improved enough to return to work, they may reduce or cancel your benefits.
Many policies have a provision that, for the first two years of disability, you qualify for benefits so long as you cannot perform the tasks of the occupation you had when you became disabled. When those 24 months have passed, they may require that you accept “any occupation.” In this case, they can reduce or end your benefits. Essentially, you can never be confident that the insurer is not going to find some way to reduce their obligation or end it altogether.
Reasons for Rejecting a Buyout
The number one reason for rejecting a buyout is the cash value long-term. If you have a policy that pays lifetime benefits past the retirement age of 65, you may well be better off continuing with the benefits. This is especially so if your family has a history of longevity. However, you can never be sure if the insurance company is not going to find a reason to reduce or cancel your benefits.
Another important point to consider is the fact that a cash buyout is permanent. Should you accept it and run out of money by not investing or managing your finances wisely, you cannot go back and ask for more benefits. Your policy was closed the moment you accepted the buyout.
A buyout is not for everyone, and you certainly don’t want to negotiate one on your own. The insurers are sure to slam the door on your requests as soon as they can, citing reasons that you may not even understand. You need the help of an attorney experienced in negotiating in LTD buyouts who can stand up to the insurer’s bargaining tactics.