Many insureds are contacted each year by their respective long term disability insurers with claim settlement proposals. The purpose of these proposals is the buying out of a long term disability claim from a claimant whois not expected to recover from his/her medical condition and return to work. We routinely receive calls from claimants asking if their offer is fair and provide the assistance they need.
So, how do you know if your claim is receiving a fair offer for settlement? Well, the answer is a bit more complicated than meets the eye as several factors must be taken into consideration. This article will attempt to explain how such settlement offers are valued in standard English despite the mathematical underpinnings which are necessary as part of this analysis.
The first concept to understand is the concept of Present Day Value (PDV). Your claim’s value is not the simple product of multiplying the number of months of benefits with the monthly amount due. This equation fails to take into account the time value of money.
The time value of money is best illustrated by the following example. Let’s say you have $10,000.00 in an account bearing 5% interest for a period of ten years. After the ten years, your account is worth $16,470.09 due to the accumulation of compound interest over the ten year period for which $6,470.09 is the value of the compound interest over the ten year period. This interest accrual must be subtracted from any calculation involving the future value of a claim in order to render the correct present day value amount performing this calculation.
Now, let’s apply this to a disability claim:
Payments owed = 7 years (84 months)
Interest = 5%
Monthly amount = $1500.00
Therefore, when you reduce the payments to present day value (subtracting out compound interest), the correct present day value is $106,127.52 and not $126,000.00 which represents the total value of the benefits multiplied over the requisite payment period without subtracting out accumulated compound interest over time into account.
This is only the beginning of the analysis as several other factors are involved as well. Many insurers will claim to reduce your claim by a “mortality rate.” A “mortality rate” is the chance that you may die due to any cause, health, natural, or accidental during the time period from now until payments are completed.
Next, many insurers will then reduce payments by a “morbidity rate.” A “morbidity rate” is the reduced life expectancy statistically related to your particular condition.
During the course of my lengthy law career, I have never been given information by an insurer concerning how they have calculated mortality and morbidity rates. Each time, the insurer claims that such information is “proprietary.” I just tell them that it is nonsense as my clients have the right to know whether the insurer has bargained in good faith. More so, it is well understood that accidental deaths are highly uncommon and morbidity caused by most illnesses and physical conditions will not limit a person’s life expectancy below their long disability payment period cut-off of 65 years (in most cases).
Next, the insurers will propose interest rates which may or may not reflect an actual investment rate of interest that a small investor could obtain. Most of the time, the insurer’s inflate the interest value so as to minimize the value of the present day value of the claim. This creates artificially deflated settlement offers which are more favorable to their bottom line and are not necessarily fair to the claimant.
All in all, disability insurers are interested in eliminating claims from their payment roster at prices which are favorable to them. To do so, they rely on the unsuspecting nature of claimants who tend not to be financially savvy concerning how the complicated ways claims are valued. If that does not work, then it is not beyond these unscrupulous companies to bully claimants into accepting unfair settlement amounts under threat of denying the claim in its entirety. Such threats are made to ratchet up the pressure on claimants, many of whom can ill afford losing this important source of income.
Remember, a settlement is not mandatory and occurs only with the consent of both parties. To this, I will always submit the Ann Landers cautionary statement that: “No one can take advantage of you without your consent.”
Given the many variables involved in a long term disability claim settlement offer, it is advised that you contact an experienced disability benefits attorney to assist you. Otherwise, you can become another unsuspecting victim of disability insurer greed.
This firm has vast experience with the disability claims settlement process and offers reasonable fees for assistance including contingency fees for payment from increased offers due to our efforts in acquiring positive results for claimants.
Scott Elkind is an attorney in Silver Spring, MD whose practice focuses on disability issues. He can reached at 301-495-6665.