Ask a lawyer a clear question, and you are likely to get anything but a clear answer. The question “How much is my Long Term Disability claim really worth?” requires some explanation.
Type of Settlement
The first point to consider is the type of settlement: reinstatement or full and final.
A settlement involving reinstatement of Long Term Disability benefits occurs when the insurer pays some or all of the past benefits owing and resumes payment of benefits. With this type of settlement, the calculations are straightforward: the number of months owing multiplied by the benefit amount, plus interest, and sometimes less a settlement discount to take into account the risk that the insurer’s termination was justified.
The second, and more common type of settlement, is full and final. A full and final settlement is essentially a divorce between you and the LTD insurer. The Long Term Disability insurer pays a lump sum amount for both past and future benefits, and in exchange you agree to dismiss the claim and give up disability coverage under the policy. You can usually keep your extended health and other benefits provided by the policy.
How then to value a full and final settlement?
Start With Past Benefits Owing
Similar to reinstatement, a full and final settlement will include past benefits owing, which is a relatively straightforward calculation.
Add Present Value of Future Benefits
The value of future benefits is not simply the number of months to age 65 multiplied by the benefit amount. The time value of money must be considered, because $1 today is worth more than $1 a year from now, for two reasons. First, if you have the money today, it can be invested and generate interest. Second, you can’t buy as much with the same amount of money in the future, due to inflation.
The LTD insurer will therefore require a present value discount for payment of future benefits. To illustrate, $200,000 paid over 10 years, with a 5% present value discount rate, is the same as $157,942 paid today. Your Long Term Disability lawyer will negotiate the present value discount rate in your favour.
Once the total value of the policy is known, various discounts must be applied. Every case is different, but some common reasons for discounting the claim include:
- Litigation risk: Although very few Long Term Disability cases go to court, both sides must assess the claim on the basis of their chance of success should the case go to trial. If there is only a 50% chance of winning, the settlement value of the claim must reflect this risk.
- Limited power of the court: Winning in court doesn’t mean a judge orders the LTD insurer to pay benefits into the future. Judges do not have that authority. Rather, they can only order payment of past Long Term Disability benefits owing, and declare that the insurer reinstate payment of monthly LTD benefits. The only way to obtain future benefits is by way of settlement, and that means compromise.
- The future is unknown: You could get better. Your employer might accommodate a return to work. There is even the possibility of dying before the policy ends. These and other variables are called “negative contingencies”, and effectively reduce the settlement value of your Long Term Disability claim.
- Accountants, actuaries, and statisticians: Insurance companies are very good at crunching numbers. If it makes sense to settle on a full and final basis, it will. But at some point, it may make more sense, from a numbers perspective, for the Long Term Disability insurer to make smaller monthly payments over a longer timeframe than to pay out a large sum all at once.
- Discounts and offsets: The Long Term Disability insurer usually gets credit for things like CPP, CPP-Disability, and retirement pension income. If those types of income are likely in the future, it reduces the amount the insurance company has to pay, and therefore reduces the settlement amount as well.
The quality of the case presented to the LTD insurer is very important. It isn’t enough to rely on the evidence already provided. Updated records, expert reports, and new information can significantly impact the amount of the settlement.
Your choice of Long Term Disability lawyer is also important. Many lawyers claim to be skilled at Long Term Disability claims, but some don’t have the expertise required to maximize the settlement of their client’s claim.
There is therefore no easy answer to the question “How much is my Long Term Disability claim really worth?” The LTD insurer’s goal is to pay the least amount it can, whereas your goal is to obtain the absolute highest dollar amount . To maximize your recovery, be sure to retain an experienced Long Term Disability lawyer.