Net Present Value of Long Term Disability Benefits
What is the current value of your long term disability benefits? You may want to know the “net present value” of your disability benefits for lots of reasons:
Your disability insurance company may have terminated your claim. If so, you may want to know the net present value of your benefits to determine whether it is worth appealing or litigating to get the benefits you deserve
Your disability insurance company may be offering you a lump sum buyout or settlement of your long term disability claim. This payment will end your long term disability benefits but will provide you with a lump sum payment to invest in their place.
Your accountant or lender may want to know the net present value of your long term disability benefits to help you determine whether you have the financial wherewithal to take on additional debt, such as for a home mortgage or a personal loan.
If your disability claim has been terminated you should consult a long term disability attorney as soon as possible to determine if it is time to appeal or litigate.
If your disability insurance company is offering you a lump sum in exchange for terminating your claim, you should consult a long term disability attorney to negotiate a larger settlement and to help you weight the pros and cons of accepting a buyout.
Read on to understand net present value (or the time value of money), how to use the Long Term Disability Benefits Calculator, and what you should consider when considering accepting a disability insurance company buyout.
Your Net Long Term Disability Benefit (After Any Offsets)
The calculator on this page only takes into account the amount of money you actually receive in long term disability benefits, and it assumes the amount stays the same in every month.
For example, your long term disability benefit amount may be reduced by payments you receive from the Social Security Administration, a Workers’ Compensation benefit, or from other sources. Similarly, you may have state and federal taxes withdrawn from your benefit before you receive it. For this reason, you should use the net amount of your benefit after offsets.
This calculator also does not take into account any changes in the amount of a long term disability benefits. Including that it does not take into account any cost of living adjustments (COLAs) you may be entitled to. Your policy may have a rider or other provision that increases your long term disability payment periodically. To make this calculator as easy to use as possible, it does not include an input for COLAs.
If your particular situation calls for a more complicated calculation, we urge you to get in touch with The Maddox Firm to help you value your benefits appropriately.
The Net Present Value of Long Term Disability Benefits
Net Present Value is the amount of money paid all at once today that is equal to amounts of money being paid over time.
Net Present Value is a concept that incorporates the “time value of money” into the valuation of a stream of benefit payments. The “time value of money” just refers to the fact that you would rather receive money today instead of receiving the same amount of money in the future. For example, you would rather receive one hundred dollars ($100) today instead of an equal one hundred dollars ($100) one month from today. On the other hand, you might be indifferent to receiving one hundred ten dollars ($110) one month from today versus one hundred dollars ($100) today.
In other words, money in your hand today is worth more than the promise of money in the future. This is the time value of money.
The time value of money is closely related to discount rates and interest rates.
Present Value Discount Rate for Future Long Term Disability Benefit Payments
The net present value of future long term disability benefit payments takes into account two factors. First, the amount of the benefit. Second, the present value discount rate.
To use the previous example, if you were truly indifferent to receiving one hundred ten dollars ($110) one month from today or one hundred dollars ($100) today, the rate for that period would be 10% because ten dollars ($10) is 10% of one hundred dollars ($100).
When valuing your long term disability benefits, an appropriate present value discount rate takes into account the alternative uses of the money for both you and for the insurance company. For example, if you receive a lump sum payment right now, what would you invest in? What would the return on the investment be. For the insurer, if they give you a lump sum payment, how much would it cost them to borrow an equivalent amount?
When choosing a discount rate, long term disability insurers usually use a rate published by Moody's Investors Service and available from the National Association of Insurance Commissioners that represents the recent monthly averages of the composite yield on seasoned corporate bonds. It is available at https://content.naic.org/research_moody.htm.
When determining the present value discount rate, you should consider whether a different discount rate is appropriate based on the alternative investments you may be able to make with a lump sum payment.
Interest Rate on Past Due Long Term Disability Benefits
Just as a present value discount rate is used to value long term disability payments to be made in the future, an interest rate is used to determine the net present value of payments that should have been made in the past.
An interest rate might be relevant if an insurance company has stopped paying long term disability benefits. Those payments should have been made in the past, and they may be subject to court-ordered interest.
If you appeal the termination of your long term disability benefits, the payment of those past benefits is not likely to be subject to interest.
If you sue to recover long term disability benefit owed to you, the benefits that should have been paid to you in the past may be subject to interest. The amount of that interest rate is frequently the subject of negotiation between the parties, and it is frequently the subject of litigation. In New York, NY CPLR Section 5004 provides that the statutory rate of interest is 9%. Usually, the interest rate on past due benefits is calculated on a simple basis, meaning that no interest is calculated on the interest incurred over the course of the disability insurance company’s nonpayment.
What You Should Consider When Considering Accepting a Disability Insurance Company Buyout
First, we should say that in general, you should not request a buyout from a long term disability insurance company. It is a bad idea. By requesting a buyout, you are signaling to the insurance company that something has changed. The insurance company will look to see if you are contemplating a return to work or if your medical condition has improved. It’s not fair, but nonetheless, do not request a buyout.
If your disability insurance company offers you a buyout, contact an attorney to negotiate for more than they are offering.
Before accepting a settlement or buyout offer, consider the following factors:
How much of a hassle is it to keep updating the disability insurance company? It’s always a pain, but how much of a pain are you willing to endure? Do you just want to be done with dealing with these guys? More concretely, are you paying a law firm to help you with your claim? Take that amount of money into account when assessing a buyout offer.
How could you use the money? Do you have an option to invest a lump sum in a lucrative way? Or, conversely, do you have high interest debt (such as credit card debt) that you could pay off with a lump sum?
What are the chances your medical condition will improve? Or is there a miracle treatment on the horizon? If there is some possibility of improvement, you may be willing to accept a lower offer.
What are the chances you will pass away before receiving all of the long term disability benefits under your policy? It is a grim prospect, but if your mortality risk is increased due to your conditions, you may be willing to accept a lower offer so you have money in your hand now. On the other hand, if your conditions are not expected to shorten your life, there is no reason to accept a lower offer.
We always recommend speaking with a trusted attorney before accepting a buyout of a long term disability insurance claim. The team at The Maddox Firm will look over your insurance policy, correspondence from your insurance company, medical records, and any other relevant documentation in order to give you personalized guidance regarding whether to accept a buyout offer.
Whether you are looking for assistance in navigating the claims process, appealing a termination, litigating a final adverse decision, or navigating a buyout offer, The Maddox Firm can help.
Contact us so we can help you with your claim, appeal, or litigation the right way.