Disability insurance dilemma
To settle, or not to settle?
By Arthur L. Fries, RHU

No one wants to become physically unable to work in his or her chosen profession. But the possibility exists, and many doctors of chiropractic purchase disability insurance to protect their income.

If you become disabled and make a claim, you may need to make a choice: Accept a settlement or take a monthly payout.

If you agree to the settlement — a buyout — you give up your disability policy to the insurance company; they no longer pay you a monthly benefit.

Some disability carriers (or administrators) prefer to approach a claimant about a buy out; some companies wait for the claimant to ask for a settlement; and others do not consider buy outs.

Some companies offering settlements provide an initial offer that is right on the money: Their offer is fair and based on sound actuarial principals. These companies are not likely to deviate from their initial offer.

Others like to low ball the initial offer in an effort to pay the lowest possible figure.

For you to decide if a settlement offer is good, you need to understand a few words of industry jargon and the process by which insurers calculate a settlement.

INDUSTRY JARGON

Insurance settlements are calculated using actuarial data. Insurers use the terms "present value" and "future potential benefit" as well as COLA (cost of living adjustment):

• Present value. This is a discounted value that takes into consideration the insurance company reserves and a discount factor that represents "unearned interest" for future years;

• Future potential benefit. This is the value of the benefit at age 65 or at the age of your life expectancy; and

• COLA. COLA stands for cost of living adjustment. Not all disability policies include this clause. If your policy includes a COLA benefit, find out if the benefit would be paid on the basis of simple interest or compound interest.

Almost all COLA benefits level out at age 65 and then convert to a set amount for a lifetime payout.

CALCULATING THE SETTLEMENT

Disability insurers do not pay the full value of a future potential benefit when they settle a claim. Instead, they reduce the future potential benefit to the present value, then apply an interest factor — an additional reduction made for mortality (when the insurance company

thinks you will die) and a morbidity factor (if the insurance company thinks you have a potential for coming back to work).

Finally, the insurance company applies a further discount to give itself a profit margin. The lower the offer, the higher the profit margin will be.

THE PROS OF A BUYOUT

Settlements are right for some people, depending upon their emotional and financial standpoints. Some of the reasons to consider a disability buyout include:

• You need tuition money for college-aged children, and your long-term goals have to be set aside to take care of short-term obligations;

• A financial investment may arise which may provide substantial gains in the future and may not be available at a later date;

• You have an opportunity to enter into a business that can utilize past skills and education but does not conflict with your medical symptoms;

• You no longer want to deal with claim forms (progress reports, attending physician statements), independent medical exams, functional capacity exams, video surveillance, field investigations, submission of tax returns, and other documents after a disability claim has been approved;

• You want to eliminate apprehension that your claim may be discontinued;

• A change in claim-management philosophy by the insurance company or administrator or change in claim personnel now opens up the possibility of a settlement;

• You experience a change in your health which might increase mortality but is not known by the insurance company; or

• You anticipate your health improving and you may be able to go back to your profession.

THE CONS OF SETTLING

A buyout is not without its negative aspects. Some of the reasons to con-sider turning down a buyout include:

• You have a lifetime payout in your occupation and you have a family history of longevity;

• You may squander the money foolishly in terms of bad investments or frivolous spending; or

• With a large lump sum settlement, you may be bombarded by friends or relatives asking for monies that should be used for long-term investment purposes.

To settle (or not) is a personal choice influenced by financial realities. It would be wise to seek out a consultant who has handled many disability claims and is familiar with the disability-buyout negotiation process.

SIDEBARS:
Settling: A real-life example
Who can help with a buyout?

Arthur L. Fries, RHU, is a disability claims consultant. Although no longer active in selling, for many years he has specialized in the sale of individual disability insurance to attorneys. He can be reached at 800-567-1911 or through www.afries.com.