When to Negotiate a Lump Sum Settlement from a Disability Insurance Company

The lump sum settlement, like many issues about disability insurance, is rife with the possibility of expensive mistakes.

Editor's Note: This is the final article in a series of four prepared by Jason Newfield and Justin Frankel of Frankel & Newfield law firm on disability claims and what the practicing dentist can expect when filing a claim. Their goal is to educate dentists, so they are better prepared to file and address the outcomes of their disability claims.

A word of caution: the first offer made by a disability insurance policy to a claimant is going to be a low offer. The problem facing the disabled dentist is that they are likely to be tired of doing battle with the disability insurance company, scared that they might end up with nothing, and may not know how the insurance company determines the value if their policy. This is one you don’t want to do on your own—the risk is too great.

Not all dentist’s disability insurance policies are eligible for lump-sum settlements. Such a resolution is what is known as an “outside the contract” settlement. It is never mandatory for an insurer to pursue a lump-sum settlement of a claim. But beware, if an insurer is interested in doing this, it must be favorable to them, so careful consideration of the issues is required.

Like any division of any insurance company, the disability insurance company has a lot of number crunchers on its team: analysts, economists and actuaries. They know what the aggregate value of your policy is and what it costs the insurance company every time a check is deposited into your account. Offering a lump sum settlement is only going to be offered if it will ultimately save the disability insurance company money. Often, by moving a claim (liability) to a resolution, they are able to free assets for their corporate balance sheets. This helps the company’s overall profitability.

There are a number of factors that need to be considered by a disability insurance claimant before considering entering into any kind of negotiations with the long-term disability insurance company:

• What is the present value of your disability policy?
• How is that calculated — what factors are utilized, what assumptions made?
• Does your policy have a lifetime payout, or do benefits end at age 65 or Normal Retirement Age?
• Will you ever be able to return to practicing dentistry, or working in any capacity in the field?
• How old are you and what is your life expectancy?
• How many disability policies do you have, and are they private/individual policies or group policies?
• What is the potential taxability of any settlement?

While the idea of never having to worry about if the disability insurance company is going to terminate or delay benefits is tempting, there are pros and cons to the lump sum settlement that must be strongly weighed and considered.

Before you can make an informed decision, you’ll need to understand what your policy is worth to you, and what it is worth to the insurance company.

The value of your policy is called the “present value of future benefits.” It is not a matter of simply multiplying your monthly benefit over 12 months and then multiply that by the number of years left until the end of the policy.

There are many other factors to consider, among them, life expectancy, interest rates and inflation, which will help with a calculation of the Present Value. A dollar today is worth more than 100 cents in 10 years. The concept of determining present value is not difficult once visualized.

The younger you are and the bigger your monthly disability benefit, the more interested the disability insurance company will be in a lump-sum payout, as the reserves freed up from settlement will be greater.

Let’s say your disability benefits came to $100,000 annually, and you had twenty years left on your policy. The disability insurance company is looking at the total amount it would have to pay you, the value of the total in terms of current and future interest rates, what reserves are available to cover your policy (and those of thousands of others) and the rate of inflation.

A lump-sum disability policy buyout is a negotiable item, and often, the first offer is going to be low (relatively). The insurance company is counting on the dentist going into negotiations with little information, or incorrect information. The advantages and disadvantages of resolution in a lump-sum settlement need to be reviewed and analyzed by experienced counsel who understands how disability insurance companies perform their analysis and equally importantly, who understands the situation facing a dentist who has become disabled.

Gather all information from the insurance company before agreeing to anything:

• The total value of all remaining payments
• The number of remaining payments
• The amount of the proposed lump sum
• Any fees or costs that would be attached to the lump sum
• Taxability issues

Another consideration is whether or not you will be able return to work, either as a dentist or in some capacity that will create an issue for your receiving further long-term disability insurance benefits. If that is the case, a buyout may make sense, as it may free you to engage in other activity.

But remember, if the offer is too low, and you accept it, there are no “do-overs.” And once the insured dies, there are no further continued payments to a surviving spouse.

The lump sum settlement, like many issues about disability insurance, is rife with the possibility of expensive mistakes. Working with an experienced disability insurance attorney can help you navigate the pitfalls: those you might expect, and the unexpected.

RELATED: For more on filing a disability claim:

• Part 1: Filing a Claim for Disability Benefits — What You Can Expect
• Part 2: What Happens After You've Filed a Claim for Disability Benefits
• Part 3: The Disability Appeals Process and Litigation

Jason Newfield and Justin Frankel are the founding partners of Frankel & Newfield, a law firm focusing on long term disability insurance issues on behalf of claimants. Both have attained AV Preeminent ratings from Martindale-Hubbell® and have been selected for inclusion in the Metro New York Super Lawyers. The practice represents many dentists, orthodontists, periodontists and other medical professionals.