I have read your blog post on “LUMP-SUM BUYOUT OF A DISABILITY INSURANCE POLICY:3 THINGS YOU MUST KNOW BEFORE YOU ASK YOUR INSURER” and queries and your responses. It was very informative and has been very helpful. Thanks very much for taking time - to share your knowledge and responding to queries.
My LTD history so far:
I have been on employer sponsored LTD since early 2011. Have been receiving CPP-D since 2012 and LTD monthly payment has been offset to account for CPP-D monthly payment. MVA subrogation with LTD insurer was completed 2 years back. My LTD is coded “Permanent” per insurer’s records gathered during MVA Subrogation.
Employer pays monthly extended health premium and contributes both employer and employee monthly payments to registered pension plan.
I am 45 now and my LTD plan is till 65. I have not received any buyout proposal from the insurer and I am thinking of asking for a voluntary LTD buyout. In this regard, I wish to ask for your feedback and inputs on the following queries:-
As my LTD plan is through by my employer, Does my employment with my employer automatically end, with the settlement of LTD buyout with the LTD insurer?
If my employment ends with my employer with the LTD buyout, I will lose a) Extended heath coverage b) Contribution to Registered Pension Plan c) Life Insurance coverage.
Does the LTD insurance providers ever consider these components in arriving at the LTD lump sum quantum negotiations? (or) Being my buyout request is voluntary, Should I be prepared to forgo these significant components?
3, My LTD has 2 components a) Taxable Non-Indexed monthly payment and b) Non Taxable Indexed for Inflation (Indexed to Cost of Living Allowance (COLA) up to a maximum of 4% per year) monthly payment.
In arriving at the Present Value (PV) calculation for my LTD monthly component that is Indexed to COLA, Can I ignore the “Discount Rate” (4% in your example)?
Is this a valid assumption (or) Would the insurance company still apply “Discount rate” to arrive at PV of this LTD component as COLA rate is typically much lesser than the “Discount rate”?
Thanks very much for your time and all your help. Looking forward to your inputs.
These are great questions and I will answer them in order below:
Maybe. This is a complicated answer that would depend a lot on the facts of your situation and the relationship between the LTD plan and your employment. Generally speaking the LTD plan and your employer are separate agreements, so one does not dictate the other. However, if you are being paid out for future LTD benefits, then you can’t turn around and try to go back to that employer right away. With some buyouts they will require you to end your employment as part of the deal because of the relationship between the LTD plan and the employment.
Yes, in pretty much all cases once you do a buy out you will lose extended health coverage and the ability to continue to contribute to your pension plan. Those two are a given. There is no wiggle room with the pension as that is often clearly set out in the pension plan rule and regulations. There may be some wiggle room on the extended benefits, but that is an issue between you and the employer and really has nothing to do with the LTD insurer. Its just that many employers are allowed to keep you on the group medical plan as long as you are approved and receiving LTD benefits. They may be required to take you off that plan once you are no longer “receiving LTD payments”. You can usually negotiate the option to convert your current life insurance to an individual life insurance.
You can’t just ignore the discount rate. The COLA will provide an offset, but inflation is generally only 1% or so per year. I can’t advise on how you would do the calculation. You have a complex plan so general advice would not apply.
In a situation like you are describing, I always strongly discourage people from seeking a buyout. If you have a pension, then the pension losses arising from a buyout can be substantial. Buy-outs of an approved claim rarely make sense from a financial sense…only in situations where you have very high credit card debits so you would realize big savings form paying off debt.
Thanks very much for your time and detailed response to my queries.
I understand that my buyout is kind of complex and “employment” question is a big unknown and it determines the overall decision making.
I am looking to move to abroad where I have family support to help me with my health situation and that’s the primary driver for my buyout plan. I understand that I will be forgoing significant financial support and health benefits that are critical for my situation by going in for a buyout. As far as I am aware, my LTD plan does not have residency restriction as I was allowed to travel out of country twice each time for 3 months as long as I was continuing with ongoing treatment. I am not sure if the LTD plan allows for permanent stay outside the country and will be a challenge to provide reports/health records. Not sure if the move itself will trigger reviews and/or denial of the LTD. Considering this, I am hoping to go for a buyout to settle for good and move.
COLA: Thanks very much for guiding me that discount rate should be used along with COLA.
Based on your feedback, I researched a bit and came across a calculator that uses discount rate in conjunction with COLA [ 铁岭绿锥电子有限公司 ]. Hopefully this will given an idea to arrive at PV for my LTD component with COLA.
Pension Plan: I understand that once the employment ends, pension plan contribution by employer and employee ends. However, I was hoping even if I have to forgo extended health benefits, I could factor in the pension component as a monthly amount (similar to LTD monthly amount) and arrive at PV to use it in the overall buyout negotiation. Not sure if the LTD insurer will consider this component at all.
May I please request for your recommendation on “Pension plan contribution by employer while on LTD” in buyout calculation. Does LTD insurers ever consider this monthly component’s PV in buyout negotiation?
No, if the LTD insurer is doing a buy out they won’t add in payments for the pension plan or to take into account pension plan loss. This is because once you do a buyout, the Pension Plans usually do allow you to continue to contribute to your pension plan.
I assumed, by ending LTD (through buyout), my employment will end as LTD is sponsored by the employer. I guess I am wrong to assume, I could factor in employer’s monthly contribution component to the pension plan (Employer pays both employee + employer contribution while on LTD) that will end with the buyout.
Your employment relationship is separate from your relationship with LTD insurer, but you are correct that most employers seek to terminate your employment upon learning of a buy out or settlement.
LTD insurer would never pay you for future lost pension contributions. They say if you want that, then don’t do a buyout or settlement. You have to stay on claim to get that benefit. This is why buyouts almost never make sense from a strictly financial viewpoint
Hi David
With our organization, LTD is quite separate from our employee pension insurance and they review my medical state on their own and decide and will cover me up to age 65 if I am still deemed disabled.
I always recommend people to avoid lump sum buyouts when you are in an APPROVED claim situation. There is no financial benefits to take a lump sum over just receiving the monthly payments. You end up getting 50-70% of the present value of future payments… at best, and then only if the insurance company initiates the buyout discussion. If you bring up the idea of a buy out they can see that as a red flag and cut of your payments. They often think that a person wants a buyout so he or she can go back to work. Unless they bring up the idea of a buyout you risk the insurance becoming very suspicious of you in a negative way.
David Brannen
Disability Lawyer with Resolute Legal
The response posted above is based on the limited factual information made available and is not intended as a full and complete response to the question. The only reliabile manner to obtain complete and adequate legal advice is to consult with a lawyer, fully explain your situation, and allow the lawyer enough time to research the applicable law and facts required to give an adequate opinion. The basic information provided above is intended as a public service only, a full one-on-one discussion with a lawyer should be done before taking any any action. The information posted on this forum is available to the viewing public and is not intended to create a lawyer client relationship with any person. If you want one-on-one advice, please click here to request a free consultation or call toll free 1-877-282-5188 to speak with a member with our disability claim support team.
I read your “Lum-sum Buyout…3 Thing You Must Know” with great interest. I have 2 questions following my brief situational description.
I have been on LTD since 2005. In 2008 my insurer asked me to apply for QPP Disability to offset some of insurers cost. I was accepted and deemed to be permanently disabled.
My total benefits are 36k annually. If I were to take early retirement in 3 months time at age 63 I would receive 47k. I feel that the 2 years should be worth something. My benefits from insurer are 24k + 4-5k in meds and dental coverage annually which totals about 57k for the 2 remaining years.
I realize that you discourage seeking buyouts but due to the short period of time remaining before mandatory retirement I thought this might be a situation that may be mutually beneficial. My questions are:
Should I in this scenario pursue a buyout?
What do you think would be a fair amount for the 2 remaining years?