When Cash Is King, Insurers Go On The Hunt For Buyout Bargains
Beware Of The “Immediate Dollars” Deal
Get ready for a wave of disability policy buyout offers from insurance companies in the near future.
With financial earnings in the dumps and prospects for an early recovery dim, insurance companies with disability income and other long-term payouts on their books are likely to be looking for immediate savings.
This is especially so since disability insurers are very aware that many of their beneficiaries are having trouble making mortgage payments, meeting college tuitions and just plain paying their bills in this severe economic turndown.
Disability income insurance companies see these times as an opportunity to catch long term disability beneficiaries in a stressed and highly vulnerable mode with many of them having lost a good part of their incomes and retirement packages in the stock market meltdown.
What better time to dangle a relatively large lump sum of cash in front of the insured?
Policy and settlement buyouts are complex issues and broad experience in successfully negotiating such deals is critical. Insurers like nothing better than dealing with a novice in buyout negotiations, especially if the novice needs the money and is personally involved in the outcome.
There is no mystery as to why insurers are turning more and more to the buyout in these tough economic times. Insurers make money in two major ways:
1. They invest their money and earn interest.
2. They try not to pay claims if they can get away with it
In today’s economic turmoil, the disability insurance company’s return from investments and interest has been drastically reduced. This affects the insurance company’s ability to keep its investors happy and also makes it more challenging to find the money to keep operating.
Insurance companies also know that many of their beneficiaries are having the same if not more difficult monetary problems. So, why not try to buy out the beneficiary at a bargain price, thereby zeroing-out the future obligation, taking the liability off the insurer’s books, and releasing the insurer’s reserve funds, which the insurer can then use in any way it sees fit?
How tempting for a beneficiary to grab a lump sum now and not worry about the long term consequences.
Issues which must be carefully considered for the beneficiary are:
- Family circumstances and needs.
- Are there other investments or incomes (i.e., annuities? pensions? SSDI?) which will replace the settled-away insurance benefits for the family?
- In view of the nature of the disability, what is the likelihood of the beneficiary living to the end of the benefit term? These benefits usually end at death.
- In view of the nature of the disability, what is the likelihood of the beneficiary recovering the ability to resume work before the end of the benefit period? Ability to resume occupation as described in the policy would terminate DI benefit payments.
These issues have to be honestly and thoughtfully resolved by the beneficiary which is difficult to do when times are tough. The beneficiary is not to be blinded by the cash offer if it will leave a large, irreplaceable hole in the family’s ability to make ends meet in the future.
Other issues are the present value of the amount which the beneficiary would receive if the insurance payments were to run for the full term. The most important part of the present value calculation is the interest rate applied in calculating present value. This is sure to be a bone of contention with the insurance company.
There also has to be negotiated a “mortality” factor which is based on all of the illnesses or injuries currently facing the insured, not just those which disable the insured. Insurers always take the position that the claimant, because of the disability and any related medical conditions, will not live to the benefit cutoff date. So, insurers reduce their offer by an amount that coincides with their projected date of the claimant’s demise.
Another reduction to be negotiated is that most insurance companies have an arbitrary rule that they will not pay more than a certain percentage of the net present value of benefits; no amount of reasoning or cajoling will get them past that internally established ceiling, so a beneficiary has to go into the negotiations understanding this important reality.
Cash money is in short supply for both insurers and beneficiaries.
The mix makes for a perfect storm of buyouts. Insurers want to get a good break on their obligations, clean up their balance sheets, and free up cash reserves which are not earning great returns. Beneficiaries may be in great need because their income and wealth has taken a big hit and they are falling behind on credit card debt and home mortgages. Cash now is very attractive to them.
But, beneficiaries must be fully aware of the dangers involved in a cash buyout of their benefits by the insurer. The reality is that except in unusual circumstances, buyouts are rarely in the financial best interests of an insured who has an otherwise unblemished claim. Beneficiaries must understand the long term financial realities of a buyout and not let the immediate cash blind them to the possible consequences in the future.
That’s why a knowledgeable, experienced, not-personally-involved, NJ Disability Lawyer in the beneficiary’s corner is a must.