By Bernard A. Kansky, Esq.
©2005 Bernard A. Kansky
All Rights Reserved

The questions and answers set forth in this column are an expression and exchange of ideas of a general nature. The interpretation of laws, rules and regulations vary from time to time and are based on the particular facts of a specific set of circumstances at any given time.  The law is fluid and can and often does change from day to day.  If you have specific questions, it is essential that you consult with your own attorney or leave a message at my office at 617-227-2020.

 

Q: I am 38 years of age and have been totally disabled by CFIDS/ME/Fibromyalgia for 5 years. Technically, I am entitled to benefits until I reach age 65 year if I live that long and if I remain disabled that long. My disability insurance carrier has offered to lump sum my claim if I am willing to compromise the amount that I would be entitled to. I would like to get rid of the disability insurance carrier because I feel like a prisoner who is under surveillance most of the time and am afraid to try to do anything more than the usual even on an occasional good day because then I become afraid that the disability insurance company will use that rare, extra-active day as an excuse to stop my checks and then I could lose my home, my credit and everything. Is there anything I can do to get out from under the constant pressure caused by my disability insurance carrier and have my "iffy" monthly disability benefits converted to fixed guaranteed monthly benefits?

A: Absolutely, although you will need an attorney experienced in handling this specialty.
 

First: is determining the amount of the lump sum settlement that would be fair and reasonable under the circumstances. Most companies will use a formula to determine how much they would have to pay you until age 65 years assuming that you stay alive and totally disabled by the terms of the policy or plan. Once that amount is determined, then it will be reduced by applying a formula for present day value. The higher the prevailing corporate bond interest rate at the time, the less the present day value (PDV) of your claim. Therefore, if the company anticipates paying out all of the money you could possibly collect, and assume for the sake of argument that mathematically that would be $500,000., then the $500,000 would have to be converted to present day value, (PVD) by the present prevailing interest rates. Hypothetically, that could reduce the $500,000. to $375,000.
 

Second: After the resulting, although not necessarily agreed to sum of $375,000., then the company will reduce the present day value, (PVD), of $375,000. by another percentage, to a sum which factors into the equation, your morbidity, likelihood of recovery, and possibility of success in contested litigation, in the event the disability carrier at some time in the future, prematurely discontinues your monthly disability benefits. The younger you are, the greater that percentage will be, so that at age 38, the company would reduce the present day value, again hypothetically, to 65% and that would reduce the $375,000. to $243,750. If however, you are in your late 50's and you have only 7 more years to survive and remain disabled for the disability carrier to pay, then the percentage of reduction may be to 70% instead, (less chance of recovery and/or intervening death, i.e. rate of morbidity, along with your increased chances for success in contested litigation). The hypothetical 70% of the hypothetical $375,000. would be then be $281,250.00 or $37,500. more than a younger person. 
 

Third: Assuming, that after some additional negotiations, after factoring in the percentage reduction for morbidity or recovery, and also the percentage reduction for present day value (PDV), the parties have agreed upon the amount of the lump sum settlement, the next question becomes how is it to be paid to you. If the amounts you have been receiving have been tax-free and not subject to IRS W-2 or 1099 forms, accepting the lump sum payment of the hypothetical sum for the younger person in the amount of $243,750. would not necessarily be taxable. However, any interest or dividends subsequently earned by you by investing that amount could be taxable. If the monthly payments have already been taxable to you, then, it is likely that the lump sum payment in one tax year would also be taxable to you and at a higher rate, based upon the lump sum amount. There are alternatives if not all of the money received is needed to immediately pay past overdue bills etc. and if the company paying the disability benefits is agreeable, (may have to be part of the overall negotiations, but to date, only one company has refused! ), a reinsurance arrangement with another company may be an option.
 

Fourth: If the lump sum payment is taxable, then you should be able to deduct the legal fees and related expenses incurred to obtain this lump sum settlement. Also, when taxable, many people will arrange to have it split up so that a portion of the lump sum payment is paid at the end of one year and the other portion paid at the beginning of the following year. For other methods of minimizing the tax consequences, you should consult with an attorney and a CPA. If the monthly payments have been tax free all along and if the lump sum is tax free then the options are much better. In my opinion and by far, the best option is a reinsurance agreement by which the payment is made directly by your disability carrier directly to a reinsurer which then guarantees a fixed, although lower monthly payment for a minimum of 20 years, or any other fixed minimum period agreed upon, and then for the rest of your natural life and your spouse's natural life, if you predecease your spouse. If you and your spouse die before the the minimum payment period of 20 years, or any other fixed minimum period agreed upon, then the remaining payments are paid to one or more beneficiaries designated by you in the reinsurance agreement.
 

Fifth: Key Advantages of Reinsurance, When Available:
 

1. Payment is guaranteed whether you are sick or not, and whether you attempt work or not, and even if you wish to attempt a return to your regular occupation or another occupation whether it be full-time, part-time or otherwise, as you see fit. Regardless of your activities, payment is guaranteed for the minimum number of years agreed upon at the outset of the reinsurance agreement and for the rest of your life, or if you prefer until you attain age 65 years.
 

2. It is unnecessary to make frequent MD visits just to be able to provide your disability carrier or ERISA Plan with constantly updated medical reports and pharmacy records, or to be examined by yet another "IME," paid for by the disability insurance carrier. You avoid all of the factors and hassles that prevent you from focusing on your health. Even though you may remain disabled from being able to perform substantial gainful employment activity until there is a viable treatment, cure or management program for the disabling disease, you will no longer be subject to frequent abuse by your disability carrier or employer's ERISA Plan, and that alone can account for better health and also feeling better about yourself. You can actually try to do "extra," on an occasional good day and not be concerned that because of your activity on an occasional good day (when you might be under secret surveillance by the disability carrier), your payments will be discontinued. With this method of reinsurance, your payments cannot be discontinued except for death. Your payments are guaranteed by the reinsurance carrier for the agreed minimum term, or for your life and/or the life of your spouse, whichever is longer. Caveat: The monthly payments under this program will be considerably smaller but the overall quality of your life will be considerably better.
 

3. There is no further offset for the disability benefits you receive from Social Security. That has already been factored into the lump sum settlement. You will continue to receive your Social Security Disability Benefits for as long as you meet the requirements of the Social Security Administration-- and that is always in addition to your contractually, life-time or term guaranteed, reinsurance benefits.
 

4. By far, one of the best financial benefits from a guaranteed reinsurance arrangement is that the interest and dividends earned on the money used to purchase a reinsurance arrangement, if it was initially tax-free, retains its tax-free status as you continue to receive those monthly payments. No part of those monthly payments will be taxable, if the reinsurance arrangement is handled correctly i.e. a check is issued by the disability insurance carrier and is payable and paid directly to the reinsurer. You have the right to withdraw part of the funds for present needs, and purchase a smaller monthly payment plan from the reinsurer, given that there is usually a 2 to 3 month lag between the payment of the lump sum settlement to the reinsurer and the reinsurer starting the monthly payments to you. However, any funds used to purchase the reinsurance, (and it can be less than the full lump sum settlement i.e. sums needed to pay pressing overdue bills, etc.) must be paid directly to the reinsurer by the present disability insurer.
 

If any Claimant is interested in converting their monthly disability benefits into guaranteed reinsurance benefits and if your disability carrier has indicated any interest in a lump sum settlement, it is imperative that you work with your attorney if experienced in this unique but usually worth while specialty. Generally, this is not for the do-it-yourselfers or the novices.
 

For most Claimants and a savvy disability insurance carrier, it is a win-win situation.