The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deal with frequently asked questions in the insurance bad faith, life insurance, long term disability insurance, annuities, accidental death insurance, ERISA and other areas of the law. This article is the first of two articles that will focus on lump sum buyouts of a disability insurance claims. This article will discuss the various times the opportunity to enter into a lump sum buyout might be available to an insured, and some factors to consider when contemplating a disability insurance buyout. Part two will focus on how to value the claim and the various factors considered when calculating the buyout sum.
Long-term disability insurance claimants currently receiving long-term disability insurance benefits from their insurer might have the opportunity to receive a lump sum buyout, where the insurance company pays the insured a one-time, lump sum payment to “buyout” the claim and policy. In exchange for that payment, the insured gives up his or her rights under the policy forever and the insurance company has no obligation to make any additional payments. A lump sum buyout is potentially available even if the disability insurance coverage was provided by the insured’s employer and the claim is governed by the Employee Retirement and Income Security Act of 1974 (“ERISA”). However, given the amount of money involved, there are a many things an insured should take into account when considering a lump sum buyout.
Long-term disability insurance is designed to provide benefits to insureds who have lost the ability to earn an income due to an accident or illness. After a disability insured provides the insurance company with medical evidence sufficient to convince the company that he or she can no longer return to work, disability insurance benefits are paid on a monthly basis. However, if the insured is permanently disabled, rather than dealing with the insurance company every month until the benefit termination period (typically age 65 or the Social Security Retirement Age, depending on the terms of the Policy), the insured may be able to arrange a lump sum buyout of the policy.
Once the payment is made, the insured no longer has an obligation to prove to the insurance company that he or she remains disabled. In addition, the lump sum buyout provides the insured with a sum of money to invest or otherwise use for necessary expenses. A lump sum buyout can also provide peace of mind.
While a lump sum buyout is not advisable in every situation, there are certain instances in which a lump sum disability insurance policy buyout might be worth considering. To be sure, an insurance company will only be interested in contemplating a buy out if it feels it can save money in the long run. That being said, there are two primary times in which a lump sum buyout might be available.
The first situation where a lump sum buyout can be available is when the insured has been receiving benefits for some time, and the underlying medical condition is accepted by the insurer as being permanent and not expected to improve. In this situation, with its ongoing liability clear and beyond any reasonable dispute, an insurance company might be willing to consider making a one-time payment, rather than paying its employees to continue to monitor the claim. This situation can be beneficial to the insured, even with the knowledge that the lump sum buyout will be less than the insured would receive by choosing to continue to accept payments on a monthly basis.
The other situation in which a lump sum buyout might be available is after the insurance company determines that the insured is no longer entitled to ongoing disability benefits and denies the claim. In this situation, the insured will need to hire an experienced attorney to handle the claim and to potentially file a lawsuit to recover the benefits that are owed. A buyout can be achieved prior to litigation or after a lawsuit is initiated. For example, the insurance company maybe be receptive to a lump sum buyout, after the Complaint is filed, during a mediation, when costs are about to be expended for discovery, right before trial or even after trial. Each of these events represents an opportunity to obtain a lump sum buyout from the insurance company.
If an insured is approached by the insurer regarding a possible lump sum buyout, or even if the insured approaches the insurer about a buyout, the insured is best served by consulting with an attorney who is very experienced in dealing with these issues. Attorneys who have experience negotiating lump sum buyouts with insurance companies can help ensure that the lump sum settlement is for the largest amount possible. While the thought of receiving a large check from the insurance company sounds attractive, the insured needs to make sure, not only that he or she is making the right decision, but that the he or she is receiving the maximum payout possible.
When a disability insurance claimant is receiving disability insurance benefits, it is very likely that such benefits are his or her only source of income. Accordingly, the insured should be careful that he or she is making the right decision with respect to a lump sum buyout. If a lump sum settlement is a possibility, the experienced attorneys at the McKennon Law Group can help identify and consider all of the available options.