How is the Value of my Long-Term Disability Benefit Calculated for Settlement Purposes?

We represent many clients who have been denied long-term disability benefits in lawsuits against the insurance companies who have denied their claims. Many of our clients ask, “What is the value of my disability claim?”

This question usually presents itself in the context of mediation, which is a form of voluntary alternative dispute resolution, because our clients must decide whether to take the insurance company’s lump sum settlement offer. There are many factors to consider. To aid our clients’ decision-making process, we will prepare a “present value calculation” designed to capture the total value of all benefits in dispute.  In most circumstances, the value of your benefit can be broken up into two parts:  the past-due benefits and the future benefits.  Benefits, both past and future, are calculated by taking your net monthly benefit (total gross monthly benefit minus offsets” for other income you receive) and multiplying by the number of months benefits are due. However, past and future benefits have to be calculated differently in order to account for inflation.

Past-due benefits are calculated by multiplying the net monthly benefit by the number of months of past-due benefits you are owed. Then, we add interest to compensate you for the fact that, had you been properly paid your past-due benefits, those benefits would have been worth more in the past than they are in the present, because inflation has made the value of each dollar decrease over time.  Notably, the insurance carriers seldom factor in interest on the past-due benefits in the context of mediation. However, if your case does not settle and the court makes a decision in your favor, it has the discretion to award prejudgment interest on the past-due benefit. The percentages that courts award vary and range from the nominal interest amount rate dictated by 28 U.S.C. § 1961 (1-year constant maturity Treasury yield) to 10% interest. See, e.g., Blankenship v. Liberty Life Assur. Co. of Bos., 486 F.3d 620, 628 (9th Cir. 2007) (affirming award of prejudgment interest at a rate of 10.01 percent, compounded monthly); Oster v. Standard Ins. Co., 768 F. Supp. 2d 1026 (N.D. Cal. 2011) (finding current U.S. Treasury Rate at .3% too low and awarding prejudgment interest at the rate of 5% ).

When calculating future benefits, we multiply your net benefit by the number of months benefits are due in the future. Unlike past-due benefits, you cannot simply multiply the net monthly benefit by the number of months you have left on claim. Instead of adding interest, we reduce the calculation by a “discount rate.” This is done to capture the fact that money received in the future is not worth as much as an equal amount received today. For example, receiving $1,000 today is worth more than $1,000 fifty years from now. Not only can you invest the $1,000 today to turn it into far more than that in 50 years, but inflation will reduce the buying power of each dollar as time goes on.

A good analogy for understanding present value for settlement purposes is the cost of taking out a loan to purchase a home. If you borrow $300,000 to purchase a home, at 3.0% interest, for 30 years, your monthly payment will be $1,265. But 30 years equals 360 months of payments, which means you are paying, over 30 years, a total of $455,400 in payments. The $300,000 is principal on your loan, and the remaining $155,400 is interest on the loan. Present value of a long-term disability calculation is basically the opposite of a home loan. Instead of you receiving payments over a long period of time, you get it all at once. The insurance company is deprived of the opportunity to invest the funds, but you are provided with the ability to invest the advanced lump sum you receive.  

If you are presented with a lump sum buy-out offer from an insurance company, you should consult with an experienced disability benefits attorney. The attorneys at Kantor & Kantor have significant experience advising clients on their long-term disability settlements.  Feel free to contact us for a no-cost consultation at (877) 783-8686 or use our online contact form.

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