End of the year is very interesting particularly when Unum reps start sending out settlement offers in order to reduce financial reserves thereby increasing financial profits. Given the number of phone calls received by DCS, Inc. with questions concerning Unum’s settlement offers, it’s likely a good idea to write a post about it.
In the past, Unum’s policy is to not settle any claim for greater than 80% of the claim financial reserve. Oops…Unum doesn’t admit to claim reserves, and sells claim buyouts as a percentage of net present value. Where the company’s actual settlement amount falls on the financial reserve scale is anyone’s guess, but 75% of NPV must put the claim close to 80% of reserve or higher.
This year has been phenomenal since early in 2013 Unum’s offers of settlement were primarily based on 60-65% of net present value calculated with a discount rate between 4.2% and 4.5%. In 4th Qtr, however, Unum’s offers have been made based on 71%-75% of NPV, but with discount rates of 4.9%. The higher the corporate bond rate used, the lower NPV will be. Mortality values, a figure Unum tends to exaggerate, are actually figured reasonably at either 100 or 200 percent.
Unum’s reputation as an unfair insurance company is its own worst enemy when it comes to buy out offers since the company’s motivations are suspected from the beginning. Unum trained me as a settlement specialist many years ago, (I actually kept the “certificates” of completion of “Settlements I & II”), and I have to say that although Unum does most things wrong, they don’t do everything wrong.
Unum buy outs and settlement offers are a good example of what Unum takes great care to do ethically. This is probably due in part to Unfair Settlement Practices Acts on the books in most states prohibiting unfair settlement practices and unreasonable “low ball offers.” Unlike claims review, settlements are actually regulated and state statutes enforced.
Unum’s settlement offer letters inform insureds and claimants the offer of settlement is an option and claimants may choose to continue to receive monthly benefits. The most frequently asked question to DCS is: “If I refuse Unum’s offer will the company deny my claim in retribution?”
Although my response is always, “No”, I am quick to remind insureds a refusal of settlement places the claim back into the “risk management pool” and Unum can legitimately begin requesting field visits, surveillance, IMEs etc. I admit this doesn’t make sense since Unum would not be offering settlement had management not concluded it would have liability for the claim to maximum duration. Still, in theory, any insurance company can “investigate” and review claims as long as benefits are paid. A refusal of a Unum settlement can always keep the option door open to offers in the future.
Unum’s letters frequently offer to pay $1,500 to an attorney to review its settlement offer and sign-off that the settlement was fair. This opens up a whole new issue of attorneys negotiating settlements for a percentage of the lump-sum, or for a percentage of the increase he/she was able to get Unum to agree to. In my experience no attorney accepts only $1,500 for assisting with a settlement and the fees are always more, sometimes as much as 40% of the lump sum. It’s a quick and easy way to make money and there are legal firms (claim settlement mills) who will quickly settle claims in dispute for a percentage whether it is the best choice for insureds or not.
My objection to most attorneys involved in settlements is that there doesn’t appear to be any consideration given to what’s best for claimants, but rather a quick source of income, and lots of it. I prefer to discuss disability claim settlements as a life choice and provide insureds with information so that they can have the benefit of accurate information to make choices that are right for them.
“Will I be able to live off of the lump sum until age 65?” “Are there really low risk investments I can make to yield 4.9%” “When I exhaust the lump sum at age 65, what will I live on until I start receiving SSR, or will my SSDI be enough?” Disability settlements are indeed life choices and the “options” made should be given considerable thought. Neither attorneys nor consultants should tell insureds what to do, but instead provide information needed so that insureds can make informed choices right for them.
In my experience Unum has never pressured any insureds to accept buy out offers and will continue to pay monthly benefits when requested. Problems arise, however, when insureds misunderstand, or do not comprehend the concept of net present value and consider future value as the dollar value of their policy. Also, insureds who arrogantly exclaim, “I want every dollar Unum owes me”, probably aren’t good candidates for buy out. Settlements are a give and take option and both parties have to be willing to give a little in order to successfully transact a disability claim settlement.
DCS received a call from a female insured last week asking, “What are Unum’s motivations and objectives in offering me this settlement?” My response was, “Does it matter?” The real considerations should be whether or not the settlement offer is fair and reasonable; whether the insured can live and invest sufficient to provide adequate future benefits; and whether or not the insured can manage finances well enough to use the lump sum wisely.
Finally, tax considerations of a lump sum settlement shouldn’t be ignored. Disability benefits, including settlements are taxable to the extent the employer pays the premium and whether premiums are paid pre or post tax. If benefits are non-taxable, settlement amounts will be non-taxable as well, although DCS recommends insureds check it out with their accountants before signing on the dotted line. Accepting a large taxable lump sum just prior to year-end may not be a good idea.
Unum doesn’t touch “the tax issue” at all and usually waives any responsibility for taxes in the Settlement Release.
Bottom line, is that disability claim settlements should be considered life and family informed choices made on the basis of accurate information concerning, financial considerations, taxes, investment opportunities, fairness and reasonableness of the offer, and ability to manage money in a responsible way. There should be no significant loss of benefit to the insured to cover excessive attorney fees such as 40% of the lump sum.
If settlement isn’t the best choice in 2013, insureds can always leave the door open to offers in the future by writing Unum, “Although I am refusing Unum’s settlement in 2013 and wish to remain on claim, I will be more than happy to consider any reasonable offer in the future.”
Lump-sum insurance settlements can be good choices, but they can also be costly mistakes. Due diligence and care should be given to all insurance settlements this time of the year. Unum is aware that offering settlements around the holidays when insureds may need money encourages takers.
Still, disability buy outs should be given the careful consideration they deserve and insureds should be well armed with information prior to signing a Settlement Release.