Present Day Value in Long-Term Disability Insurance Claims

Insurance denial claims always arise in the context of a contractual relationship, that between the insurer and the insured, which has broken down. While at trial for a long-term disability claim all a judge can do is order specific performance of the contract of insurance, namely a declaration that the plaintiff qualifies as disabled under the definition of their policy, and that the insurance company needs to pay the plaintiff any arrears of benefits and put the plaintiff back on policy and resume monthly benefit payments, often a plaintiff wants nothing more to do with their insurance company and all trust has been lost between the two parties.  While all a judge can do in denied insurance claims is order specific performance, that doesn’t prohibit the parties from coming to a more creative solution to end the legal battle.

Arrears & Future Benefits

There are, generally speaking, two types of benefits that any settlement of a long-term disability must account for. These are arrears of benefits that ought to have been paid and future payment of benefits.

Arrears of long-term disability payments owed are easily determined as you simply need to confirm with the insurance company what you would have been paid for your long-term disability benefits from the day you were denied your benefits to the date of the settlement. This will be the monthly benefits you would have been entitled to, plus the Cost-of-Living Adjustment (or COLA) increase to that amount, if you have a COLA rider on your policy.  The insurance company will be able to easily tell you the COLA increases during the period of your arrears, allowing you to easily calculate your arrears.

The difficult part arises when it comes to future payments under the policy. This will deal with your future disability payments and involves a lot of guessing or as the courts have referred to it, “crystal ball gazing”.  The first question is, for how much longer will you remained disabled under the policy? For some people it is clear their disability won’t ever improve or resolve. For other cases it isn’t as straightforward.  This is something best battled out by the expert medical evidence in Court or at mediation.

Another issue is what amount to attribute to Cost-of-Living Adjustments going forward? COLA increases are usually tied to the Consumer Price Index (CPI) and limited to how much they can increase in a year pursuant to your insurance contract. This can make it difficult to come to an exact number for the increase going forward and can require the assistance of an expert economist.

When you’ve come to an agreement of approximately how long the parties will agree to a future disability and what COLA increases will be applied, the question then comes what is the lump sum Present Day Value of your future benefits?

Present Day Value of Lump Sum Settlements

When receiving a lump sum amount in consideration of future monthly benefits, sometimes many years’ worth of benefits all at once, the value to the plaintiff is far greater than the value of a same amount paid out in increments on a monthly basis over a number of years.

If the money can be invested for a return of 3-5%, then the lump sum present day value is already greater than the value of the same amount of benefits in smaller amounts over time.  However, there is more to present day value than just the investment potential as you have to factor in inflation and purchasing power as well.  The logic goes that inflation will increase over time and the price of goods will increase over time as well.  As such the value of the same dollar amount at a future date will be worth less with respect to purchasing power than it is currently worth in the present day.  This results in a discount for the paying party so as not to overcompensate the receiving party for the present-day value of the payment.

The mathematical formula to determine present value is:

Present Value=  Future Value


 where r is equal to the expected rate of return and n is equal to the number of time periods.

 How Does This Impact My Settlement?

The impact of the concept of a present value for lump sum settlements, in simple terms, is that your settlement will be less than a dollar-for-dollar amount extrapolating your expected long-term disability benefits into the future, but this does not mean you’re not getting a fair deal. Far from it, you are receiving a lump sum amount that you are free to invest or do with as you please all at once which, at the end of the day, has far greater value to you than smaller ongoing monthly benefits into the future.

Experienced insurance denial lawyers like the lawyers at Taylor & Blair LLP have expert economists who they can use in complex cases to assess the present-day value of future long-term disability benefits.

Long-term disability claims have strict timelines that apply so contact our insurance denial lawyers today.