Prudential is one of the world’s largest long term disability insurance carriers and often will offer long term disability insurance claimants a lump sum buyout of their policy—providing the claimant with a lump sum of money in exchange for canceling the policy and eliminating the claimant’s right to ongoing disability benefits from Prudential. While this can often make financial sense for a claimant who needs these funds to pay bills or retrain for a different career, it’s not a decision that should be entered into lightly. Read on to learn more about some of the benefits and considerations of negotiating a lump sum settlement and buyout for your Prudential long term disability policy.
GREGORY DELL: Hi, I’m Attorney Gregory Dell joined today by Attorney Alexander Palamara. And we’re going to discuss long-term disability insurance buyouts with Prudential Insurance Company. And Alex, as you know, Prudential is one of probably top three or four worlds largest group long-term disability insurance carrier in the country. And they do do lump sum buyouts. Not every company does a lump sum buyout, as you know.
Let’s first in this video, I want to talk about some things that people should expect if they’re interested in a lump sum buyout. And I know that you’ve negotiated hundreds, if not thousands, of these lump sum buyouts with not just Prudential, but with multiple long-term disability insurance carriers. And it’s kind of the same type of technique that we use with all of the companies, but there are little nuances with Prudential individual.
So first of all, when someone calls you and they want a lump sum buyout, what are some of the things that you need to know upfront in order to even know if they’re a candidate for a buyout?
ALEXANDER PALAMARA: Right. So people call us all the time. They’ve been on claim for a month or two, and they see online about buyouts and they call the first month. They go, I want a buyout. And the first thing I think I have to tell them is hold on. You have to wait a little while before the insurance company might be interested in engaging in such negotiations.
Now most long-term disability insurance policies, especially the group ones that you get through an employer, they’re governed by the ERISA laws. They typically have what’s known as a change in definition of disability. So for the first few years, you might be disabled from your own occupation under the policy, but to get benefits beyond those years, you then have to prove that you’re disabled from any occupation. Then on top of that, there’s also mental health limitation language of the policy. So sometimes, if you’re dealing with a mental health disabling condition, it’s only payable for 24 months.
So people contact us all the time saying, I want a buyout. The first thing I say is how long have you been on claim for? If they’ve been on claim for longer than 24 months, then I say to them, it’s a possibility. It depends on their age. It depends on their disabling condition. You know, something that’s going to kill you, unfortunately, the insurance company might not be interested in. But there’s different parameters that we have to speak to our potential clients and to our clients about whether they are a person that the insurance company might be willing to negotiate with.
Prudential Isn’t Required to Offer a Disability Buyout
GREGORY DELL: So yeah, I want people to understand the general framework of a lump sum buyout. First of all, as you know, a long-term disability insurance company, especially Prudential, is not required to offer this type of buyout to you. The only thing that they are required to do is to evaluate your claim on a month-to-month basis, and every month, make a determination as to whether or not you’re eligible, which is why there’s no requirement for the lump sum buyout, but they will consider it. And in exchange for that, what is a person giving up if they get a lump sum buyout?
ALEXANDER PALAMARA: Well, the first thing you have to realize, the insurance company is not going to do something that’s not in their financial best interest. You know, so they are going to give you a large sum of money, but the one thing that you’re getting from that if you take a buyout– I mean, constantly right now if you’re on claim with Prudential, there’s an anvil hanging over your head. And the anvil is the fact that they can deny you at any time.
So if you do a lump sum settlement, they’re going to take that anvil away and you get a large sum of money, so you don’t have to worry about them ever denying your claim. You get this large sum of money. You can walk away.
What you’re giving up though is a lot of money into the future. I mean, let’s just say you’re supposed to get $1,000 per month for the next 10 years. It’s $120,000. If you do a buyout, the first thing you do is a present-value calculation. So that $120,000 gets reduced already to maybe $100,000. Instead of negotiating from 120,000, you’re actually negotiating from 100,000. And maybe, you get 75,000.
So if you do a lump sum settlement, you might take home $75,000, but you’re giving up the total of 120,000 over the next 120 months. But if you get a large sum of money, you have an idea for an investment, or if you have something you have to pay off, it can give you financial stability, the anvil is gone, or let’s say you maybe find an investment, or pay off a house, or whatever you need to do. It gives you flexibility.
GREGORY DELL: Right. So everyone has their own reasons for why they want a buyout, but a person should not basically be saying, like you did, look, I have 10 years left on this policy. It’s $2,000 a month. You know, it’s going to pay $240,000 and I’ll take $0.90 on the dollar because it doesn’t work like that.
So there is this concept known as present value, which is how much money do I need– how much money do I have today that will equal a greater amount down the road? So if you said, to keep it really simple, if you wanted to have $10 10 years from now, how much money would I have to give you today, assuming the money was going to grow at, like, let’s just say a 5% interest rate, although nobody’s getting that kind of interest rate, but the insurance companies can sometimes get that interest rate, so they tend to use a higher interest rate.
And if in my example, it was 5%, then maybe you need $6 today growing at 5% would be $10 10 years from now. Don’t hold me to that number because it’s not accurate. It’s just an example to show. But people, they’re shocked because they initially call us and they go, oh–
ALEXANDER PALAMARA: I did the math. My claim is worth $240,000, and I want 200,000 of it.
Lump Sum Buyouts are Calculated Based on Your Benefits’ Future Value
GREGORY DELL: Right. The other thing that a lot of people need to be aware of is you have people who are maybe in their 40s who are disabled and have at least 20 years left on the policy. And they think, well, again, I did the math.
When you get over a certain threshold of maybe 15 years, give or take, the additional years are basically irrelevant. And the reason for that is because money is supposed to basically double every 15 years. And with time value of money and percentages, the longer years really don’t add a lot more value to the policy because the idea is that when you get this lump sum of money, you’re having more money over time to grow.
So I tell claimants that whenever we’ve done buyouts– and I’m sure with your experience as well– I have never done a buyout in an uncontested lump sum buyout where the value of the offer that we got exceeded more than 10 or 11 years of future benefits, no matter how many years were remaining, whether it was 20, 25, even on a lifetime claim because of this time value of money, which is a little bit of a complicated financial calculation.
What are the other factors that people have to be aware of that they can’t just– we talked about present value– that they can’t just do the calculation and determine this is how much I should get. Talk about what the mortality rating is and how they factor that in as well?
ALEXANDER PALAMARA: Well, the insurance company takes into account the fact that you can die over the next, let’s say, you have 15 years remaining and you can die over that– sometime whatever period, you can die over the next 15 years. So let’s just say they do a lump sum settlement and you die 15 months later or a year and a half later, you die. Well, at that point, the insurance company, they made a bad investment to do a buyout into your claim.
So when they run the numbers and they do their own present value calculation, more often than not, our present value seems to be a little bit higher because they take into account mortality and morbidity ratings, they call it. Because they’re taking into account the fact that you could die over the next 15 years or how many years you have remaining under your policy. So they kind of discount it even further because of that risk. So the insurance company is not only taking into account the present value of your policy, but also the fact that you can die, and that worries them. It really does.
GREGORY DELL: Well, it’s no different than if anyone who’s watching this video is already on claim. They have a medical condition. And you know that if that person– the claimant with the medical condition– goes to apply for life insurance now, versus the person who’s the same age and doesn’t have any type of medical condition– the person without the medical condition is going to get a lower premium. They’re going to pay less for life insurance. They’re going to be what’s called A plus rated.
But the person who has the medical condition. First of all, the insurers really may say, you’re not insurable, which deals with the mortality. Or they may say, we’ll offer you insurance. And now your friend, who’s the same age you got insurance, is paying half the amount for the same premium. So that’s the example of the mortality. And you may tell them that your mom or dad lived to a hundred. They don’t care. They’re going to look at statistically, and then they’re going to use that.
And the other thing they factor in is the interest rate. And while you may be looking at interest rates, the T bond right now, the Treasury bill, or the high yield corporate bond rate– the T-bills’ less than 1%. The high yield corporate bond rate is maybe– you looked it up the other day. What was it?
ALEXANDER PALAMARA: I think it was 3.65. 3-something.
GREGORY DELL: So with these claims and a lower interest rate environment, it’s actually a good time to pursue a lump sum buyout because your money isn’t going to grow as much over time. And you need more money now in order to– you need to get a bigger settlement now because the percentage of the interest rate is lower. Whereas if the interest rate was 5 or 6, or when we have done buyouts at 7 or 8%, you don’t need as much money because the idea is that money is going to grow at 7 or 8% versus 3%.
And the other thing is that the disability insurance company– they may look at the high yield corporate bond rate which we use as a benchmark, which some disability companies do. But they’re also looking at where can they write debt at. And what percentage rate is that. And they can write debt at 5 or 6%. So they’d go ahead and say, well the rates 5 or 6%. And it’s not really a negotiable rate because it’s a voluntary offer.
The areas where we’re able to add value, in terms of these types of lump sum buyouts, is digging into the mortality rate, digging into how they’re evaluating the definition of disability. I’ve had people that have called us that actually didn’t even realize that they should have had a lifetime benefit, as opposed to a regular benefit. And the value of the offer doubled if not tripled because of the way in which they were evaluating the claim.
The other value that we’re able to offer, especially with Prudential, is the fact that we have that relationship with them, and they know that we know everything about how to evaluate these types of buyouts. And there’s not going to be any back and forth in terms of what the policy says or doesn’t say, or what the medical condition is. And also, possibly being able to change some of their ratings or the way they’re looking at the claim. Or get them another piece of information that the claimant may not be able to think about, so that we can do everything we can to really maximize the value of this offer.
Buyouts Aren’t Always the Best Option for Everyone
But I do want to stress that a buyout is not necessarily best for everybody. And the reason we put this video out there is so that you can be aware of what the factors are that go into this thing. We’re happy to, at basically a no risk obligation, try to negotiate a buyout for a claimant. We charge a percentage of whatever the benefit is. Or if you’ve already been offered a lump sum buyout already, we’re going to charge a percentage on any additional amount of money that we’re able to get for the claimant. So there’s no risk in hiring us. There’s no hourly fee. And depending upon the type of money that’s at stake here, we’re always negotiable and flexible on what the attorney fee is going to be for a Prudential buyout.
And you may be in a position where Prudential’s already reached out to you as a claimant, or you haven’t been contacted at all. And that’s where we tap into our in-house contacts that we’ve been dealing with for the past 20 years to negotiate buyouts with Prudential. So no matter where you live in the country, we encourage you to contact either Alex or myself, and we’ll immediately provide you with a free initial consultation. We will review your disability policy and discuss all of the aspects of a lump sum buyout with Prudential with you.
We also encourage you to spend a little bit of time on our website where you can get a lot of helpful tips by searching up Prudential, or searching your medical condition, or searching your occupation. You can see lots of reviews about Prudential. Things that, if you don’t end up with a buyout– because Alex, I think we mentioned, there’s no guarantee. They don’t have to give you a buyout, and not every case works in a buyout– then we hope that you’ll find the information on our website helpful to further educate you in terms of keeping yourself on claim going into the future. So no matter where you live in the country, we look forward to the opportunity to help you with your claim in the future. Thank you.
As you’ve learned, there are multiple factors to consider when deciding whether to pursue a lump sum buyout of your disability insurance policy, and no two long term disability claims are exactly alike. Dell & Schaefer has negotiated hundreds, if not thousands, of lump sum buyouts with Prudential and other disability insurance companies, and we’re well-positioned to help you evaluate your claim. Give us a call today to schedule your FREE consultation with one of our knowledgeable long term disability insurance attorneys.