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What Are Your Long Term Disability Benefits Worth?

Disability Wiki.

calculating benefit valueA common question from our clients is: “How much are my long term disability benefits worth?” Determining the current value of your benefits (also referred to as the “net present value”) isn't as complicated as it may seem on the surface. It can also be useful for many reasons.

Examples include:

    • Your long term disability insurer may have offered you a “buyout” or a settlement of your benefits. That is, the insurer may have offered a lump sum payment in place of the long term disability benefits you receive every month. In that case, you’ll want to know how the lump sum offer compares to the total value of your benefits.
    • An insurer may have terminated your benefits, and you would like to know just how much the present value of those benefits is worth. Is it worth appealing the termination of your benefits? Or if you have already lost at the appeal stage, is it worth litigating the termination of your benefits?
    • You may need to know what the present value of your long term disability benefits is for purposes of deciding whether you have sufficient assets to take on some other additional financial burden, such as a home mortgage or line of credit.

Below we’ll explain some of the key terms and the considerations you should take into account when determining the net present value of your long term disability benefits.

 

What Is Net Present Value (NPV)?

Net Present Value (“NPV”) is the amount of money in one sum paid today that is equivalent to sums of money paid at times either in the past or in the future.

Net Present Value takes into account the “time value” of money. “Time value” refers to the fact that you would rather receive money today than in the future. For example, you would rather receive one hundred dollars ($100) today than an equivalent one hundred dollars ($100) one month from today. However, you might be more ambivalent if your choices are one hundred ($100) dollars today or one hundred ten dollars ($110) in a month’s time.

In other words, money in your hand today is worth more than the promise of money in the future. This is the time value of money.

The time value of money is closely related to discount rates and interest rates.

 

How Do I Calculate the Value of My Long Term Disability Benefits?

Generally, there are two time periods to consider when determining the current net present value of your benefits: The past and the future.

Adding the NPV of your past benefits to the NPV of your future benefits equals your total NPV.

 

How to Determine the Net Present Value of Past Long Term Disability Benefits

To value your past benefits, you will need to know the following numbers:

B = benefit amount

R = annual interest rate

M = monthly interest rate. M = R/12

N = number of months (add up the number of months in which you should have received a benefit but didn’t)

Use these numbers – B, R, M, and N – to determine the NPV of your past benefits. This formula presumes a constant interest rate, a constant benefit amount, and a benefit that should have been paid in every month up to the present day.

Here are the steps you will take to determine the NPV of your past benefits:

Let’s use some real numbers to see how these steps work. Let’s keep it simple. We’ll use $1,000 as our benefit payment and 6% as our annual interest rate. And let’s use 24 as the number of months.

  1. Divide the annual interest rate by 12 to determine what the rate is on a monthly basis: Screen Shot 2020-11-05 at 3.32.26 PM. Here, .06/12 = .005.
  2. Add one to that rate: Screen Shot 2020-11-05 at 3.39.51 PM. Here 1+.005 =1.005.
  3. Raise number to the power of the number of months: Screen Shot 2020-11-05 at 3.34.17 PM. Here, 1.005˄24=1.1271598.
  4. Subtract 1 from that number: Screen Shot 2020-11-05 at 3.34.17 PM- 1. Here, 1. 1271598 – 1 = 0.1271598.
  5. Divide by the monthly interest rate: Screen Shot 2020-11-05 at 3.35.55 PM. Here, .1271598/.005 = 25.43196.
  6. Multiply by the benefit: Bx Screen Shot 2020-11-05 at 3.35.55 PM. Here, 43196x 1000 = $25,431.96.

Thus, the formula for determining the current value of your past due benefits is the following:

Screen Shot 2020-11-05 at 3.36.41 PM

In our example, $25,431.96 is the current value of two years of benefit payments of $1,000 with 6% annual simple interest.

 

How to Determine the Net Present Value of Future Long Term Disability Payments

To value your future benefits, follow these steps:

B = Benefit

R = annual discount rate

M = monthly discount rate. M = R/12

N = number of months (add up the number of months you should receive a benefit in the future)

Use these numbers – B, R, M, and N – to determine the NPV of your future benefits. This formula presumes a constant interest rate, a constant benefit amount, and a benefit that should be paid in every month starting one month from today.

Here are the steps you will take to determine the NPV of your future benefits:

Let’s use some real numbers to see how these steps work. Again we’ll keep it simple by using $1,000 as our benefit payment, 6% as our annual interest rate, and 24 as the number of months.

  1. Divide the annual interest rate by 12 to determine what the rate is on a monthly basis: Screen Shot 2020-11-05 at 3.32.26 PM. Here, .06/12 = .005.
  2. Add one to that rate: Screen Shot 2020-11-05 at 3.39.51 PM. Here 1+.005 =1.005.
  3. Raise number to the power of the negative number of months: Screen Shot 2020-11-05 at 3.43.00 PM. Here, 1.005˄-24 =0.88718567.
  4. Subtract that number from 1: Screen Shot 2020-11-05 at 3.45.14 PM. Here, 1 - 0.88718567 = 0.11281433.
  5. Divide by the monthly discount rate:  Screen Shot 2020-11-05 at 3.46.01 PM. Here, 0.11281433/.005 = 22.56287.
  6. Multiply by the benefit: Bx Screen Shot 2020-11-05 at 3.46.01 PM. Here, 56287x 1,000 = $22,562.87.

Thus, the formula for determining the current value of your future benefits is the following:

Screen Shot 2020-11-05 at 3.47.05 PM

In our example, $22,562.87 is the current value of two years of benefit payments of $1,000 with 6% annual discount rate.

 

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How Does the Discount Rate Impact My Long Term Disability Benefit Value?

To determine the net present value of payments made in the future, you have to choose an appropriate discount rate.

In the example above, if you were truly indifferent to receiving one hundred dollars ($100) today compared to one hundred ten dollars ($110) in one month, the rate for that period would be 10% because ten dollars ($10) is 10% of one hundred dollars ($100).

When valuing your long term disability benefits, an appropriate discount rate takes into account the alternative uses of the money. For example, if you receive a lump sum payment right now, what would be the return on any investment you would make with that money? On the other hand, if your insurer is going to give you a lump sum payment right now, how much would it cost them to borrow an equivalent amount?

When choosing a discount rate, long term disability insurers sometimes use a rate published by Moody's Investors Service and available from the National Association of Insurance Commissioners that represents the recent monthly averages of the composite yield on seasoned corporate bonds. It is available to view here.

But you should consider whether to use a different discount rate based on the alternative investments you may be able to make with a lump sum payment.

 

How Does Interest Impact My Long Term Disability Benefit Value?

Just as a discount rate is used to value a series of payments to be made in the future, you can use an interest rate to determine the net present value of payments that should have been made in the past.

An interest rate might be relevant if an insurance company has stopped paying long term disability benefits. Those payments should have been made in the past, and they may be subject to court-ordered interest.

If you appeal the termination of your long term disability benefits through the insurance company’s internal appeals process, the payment of those past benefits is not likely to be subject to interest.

If you sue to recover long term disability benefit owed to you, the benefits that should have been paid to you in the past will be subject to interest. New York Civil Practice Law and Rules Section 5004 provides that the statutory rate of pre- and post-judgment interest is 9%. This rate is calculated on a simple basis, meaning that the interest only accrues on the principal. No interest is calculated on the interest incurred over the course of the insurance company’s nonpayment.

 

Other Considerations For Calculating Long Term Disability Benefit Value

Most long term disability policies contain offset provisions reducing your benefit by the amount of certain other benefits you receive. For example, your policy probably stipulates that your long term disability benefit will be reduced by the amount of any Social Security benefit you receive. Similar offsets may apply to other benefits such as workers’ compensation, retirement benefits, and personal injury settlements.

Some of these offsets may only apply for a certain period of time. For example, you may receive additional Social Security Disability benefits due to a minor child. Once that child reaches the age of majority, you will no longer receive those Social Security benefits, and your long term disability benefits will no longer be reduced by that amount.

Conclusion

calculating ltd benefit valueUnderstanding the value of your long term disability benefits can be useful in many situations. The experienced ERISA long term disability attorneys at our firm can help you determine what your benefits are worth.

Riemer Hess can help you negotiate with an insurance company that has offered you a “buyout” or settlement of your benefits. We can also help if your long term disability insurer has terminated your long term disability benefits. We’ll help you decide if it is worth appealing or litigating the insurance company’s decision.

The insurers recognize our name because we’ve been helping clients file their claims, maintain their benefits, appeal terminations of their benefits, and litigate their disability lawsuits for over 25 years. Contact us to help you file your claim, protect your benefits, or file a long term disability lawsuit.

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