Long term disability payoff

[royb]

So, If you had a long term disability policy and were offered a payoff that was enough to payoff your house and you had say 8-10k leftover would you take it? You own your cars so you dont have a car payment and you now have to live on SSDI alone. Is this something you would consider so you have the piece of mind that your home is paid for?

[McDuff]

Lots of variables involved. First thing, add up all your remaining monthly payments and then compare that number with the payout. I was offered a payout that was like 60% of full payout, no way I would take that. Another big question, will you pay off the house in the remaining number of months of full payout? If so, that is a pretty safe peace of mind, as that is almost like having it paid off early since you have guaranteed income.

You could try living as if you were on ssdi alone, plus house note of course, for some time, if they give you it to you, see how you do. Plus you would then be saving money that you could bank/invest on the side.

Tough question that needs thinking long and hard.

[royb]

Ive already been offered one payoff that was only a fraction of what it's worth so I didnt take it. My home loan and longterm claim mature at about the same time.

[Art454]

Don't do it. You probably have to pay back medicare or medicaid and you end up with nothing. Seen it happen over and over to people.

[royb]

I hadnt though about that as I should have because I went through that years ago when I got an insurance settlement from my injury. I didnt know that medicare is setup the same way.

[August West]

I would compare the lump sum received plus interest received on that lump sum to total monthly payments received minus mortgage interest paid. Take whichever is greater. Of course, it's your call if your SSDI income is enough.

[funklab]

Calculate the total you will receive after interest collected with the lump sum and compare that to the total monthly payments you would have received otherwise. Take whichever is greater. I suspect you will receive more money through monthly payments. The insurance company wouldn't make the offer otherwise.

This is the way.

If you use your mortgage interest rate (presumably in the neighborhood of 3%) and the calculations come out in favor of the lump sum, it’s probably worth it.

[August West]

This is the way.

If you use your mortgage interest rate (presumably in the neighborhood of 3%) and the calculations come out in favor of the lump sum, it’s probably worth it.

At first I was comparing lump payment + savings interest received to monthly payments received. But seeing that Royb has a mortgage, I edited my comment to compare lump payments received + savings interest received to monthly payments received - mortgage interest paid.

[royb]

I think I would have to pay back medicare as someone had said earlier. I'm looking into it.

[August West]

Qualifying for Medicaid requires you to have less than a certain amount of money in the bank and less than a certain amount of income. Medicare isn't like that. It's based on age or disability not money.

[royb]

I understand how Medicaid and Medicare eligibility works, When I got injured there was a clause in my health insurance policy ( and in most that not many know about) stating that if an insurance company paid a a personal injury settlement for my injury that my health insurance was footing the hospital bills for that they would have first claim to whatever the settlement paid out till they were satisfied. I paid near 6 figures back to them off the top because of this clause. My issue is say I take a settlement from my LTD can Medicare step in and say, we've been paying his medical bills for 10 years so we are entitled to this payout like my previous health insurance did?

[Oddity]

I think I would have to pay back medicare as someone had said earlier. I'm looking into it.

Medicare does not have Estate Recovery. That's only Medicaid that does that.

[Oddity]

At first I was comparing lump payment + savings interest received to monthly payments received. But seeing that Royb has a mortgage, I edited my comment to compare lump payments received + savings interest received to monthly payments received - mortgage interest paid.

Having been on the other side of these deals, actuarially speaking, I'll add another consideration, one that I know the bean counters at the LTD company are using:

They are using inflation projections to devalue to monetary value of future payments, as monetary deflation/pricing inflation erodes the value of future payments more and more over time, based on the reduction of buying power.

So, a lower lump sum today may actually turn out to be more valuable, in terms of actual purchasing power, than a marginally larger sum over a greater period of time.

This is where the bulk of the reduction in raw dollars for these buy outs comes from.

[royb]

I knew about the inflation projection part I just wasnt sure about the other.

[Oddity]

Also, they hopefully offered you decent amount of $ to have their offer independently reviewed by a lawyer and/or an accountant (of your choice.) It's the law in law many states that they have to do this. I would not hesitate to use that, if so. It was between $750-$1000 in Virginia last I knew.

They also only (typically) make these offers once. There comes a "break even point" in any claim where they predict they'll have to pay out all (or most) of the claim vs buying you out now for between 10-25% "convenience premium" raw dollar reduction + the ~50% inflation prediction reduction. (A typical $ value of a cash buyout is between 25-35% of the total benefit raw dollar amount in payments over time.)

It is super rare that making this offer would work out in their favor at more than one point in time during the LTD claimant's lifetime, unless inflation were to dramatically lessen or a "recession" were to occur (which raises the value of payments over time instead of reducing them like "inflation" does.)

The "negotiation" points are typically non-existent (they will claim), but they are, in reality, the % of inflationary reduction they use each year, and the amount of their "convenience premium" - which is them acknowledging that continued medical review and risk of being denied in the future has a dollar value for each claimant - so they deduct what they think that's worth to you. Those 2 numbers have wiggle room in reality, whether they'll admit it, or not.

[August West]

Having been on the other side of these deals, actuarially speaking, I'll add another consideration, one that I know the bean counters at the LTD company are using:

They are using inflation projections to devalue to monetary value of future payments, as monetary deflation/pricing inflation erodes the value of future payments more and more over time, based on the reduction of buying power.

So, a lower lump sum today may actually turn out to be more valuable, in terms of actual purchasing power, than a marginally larger sum over a greater period of time.

This is where the bulk of the reduction in raw dollars for these buy outs comes from.

That's the theory. The key words are "marginally larger". If the offer is half of what you would collect over time then it's borderline predatory. An exception is if there is ample time for the lump sum to grow enough to double at a savings account interest rate. I seriously doubt the insurance company would be so generous. Another exception is if you are paying high mortgage interest. Then it could be worth it. Regardless, interest (both collected in a savings account and paid on a mortgage) factors in what you are saying.

[Oddity]

That's the theory. The key words are "marginally larger". If the offer is half of what you would collect over time then it's borderline predatory. An exception is if there is ample time for the lump sum to grow enough to double at a savings account interest rate. I seriously doubt the insurance company would be so generous. Another exception is if you are paying high mortgage interest. Then it could be worth it. Regardless, interest (both collected in a savings account and paid on a mortgage) factors in what you are saying.

The buyout offers are almost always less than half the total remaining payout. Using 2.5% inflation rates, that halves the purchasing value of any benefit (and every other dollar in existence) every 20 years. They usually project more like 4%-5% though. (The figure they use is disclosed in the offer paper work.)

So, you can be almost guaranteed that if the total benefit term is 15-20 years left when the offer is received (and it most often is), that it'll be less than 50%. More in the range of 25-40%, because they also lop of another 10-25% just for good measure. That's what they figure it's "worth" not to have to endure continuing medical and financial reviews every year or few for the next 15-20 years. (Financial reviews for folks who used pre-tax dollars to purchase the LTD coverage; because the payer gets to deduct some other forms of income, I.e. SSDI, from the monthly benefit.) That last part may be "predatory", but there is no pressure or obligation to accept, and they usually offer generous $ credits to have the deals independently reviewed by professionals.

[August West]

The buyout offers are almost always less than half the total remaining payout. Using 2.5% inflation rates, that halves the purchasing value of any benefit (and every other dollar in existence) every 20 years. They usually project more like 4%-5% though. (The figure they use is disclosed in the offer paper work.)

So, you can be almost guaranteed that if the total benefit term is 15-20 years left when the offer is received (and it most often is), that it'll be less than 50%. More in the range of 25-40%, because they also lop of another 10-25% just for good measure. That's what they figure it's "worth" not to have to endure continuing medical and financial reviews every year or few for the next 15-20 years. (Financial reviews for folks who used pre-tax dollars to purchase the LTD coverage; because the payer gets to deduct some other forms of income, I.e. SSDI, from the monthly benefit.) That last part may be "predatory", but there is no pressure or obligation to accept, and they usually offer generous $ credits to have the deals independently reviewed by professionals.

Do their reasons make any difference to us? From our perspective, the key questions are: 1) which choice pays more after considering interest/inflation? (whichever way you want to look at it), and 2) Will I have enough to live on?

[Oddity]

Yeah, sure.

But I think understanding why things are the way they are always helps. Especially for anyone thinking these adjustments are borderline "predatory". Knowing we are going to lose that value, over time, regardless, is important to consider, IMO.

(My bottom line "hot take", is this:

If we can tolerate less monthly income, then investing an inflation adjusted lump sum today is almost always gonna put us ahead, long term.

The only real consideration is the month to month living expense needs, IMO. A monkey just following the S&P500 index would do better, long term, with a lump + more than 10 years to let it sit.

Its all about 2), I think.)