Lump Sum Calculator for Long Term Disability
If your long term disability insurer has offered you a lump sum payout of your benefits, you need to know the present value of your claim to intelligently evaluate the offer. This involves reducing each future monthly payment by an increasing amount to account for the “time value of money.” The calculator below will save you a lot of time and effort by doing it for you. All you need to know is:
- Your Monthly Benefit Amount – How much you are currently receiving each month from the insurer.
- The Number of Future Monthly Payments Left – Starting with your next monthly payment date through the date that your benefits end (many policies end when you reach age 65, but be sure to check yours to see if it is longer). For example, if you have two years of benefits remaining, enter “24″. If you have 5 years and 2 months left, enter “62″.
- The Discount Rate – This is the interest rate which determines the time value of money. The higher the interest rate, the lower the “present value” of future benefits will be, because you need less money invested at that rate to reach your goal amount over time. I’ve set the default at 4% (I’ve used this amount to settle with multiple insurers), but you should consider a rate of return that you can realistically make on your lump sum over the number of months remaining on your policy.
My calculator gives you the option of (1) seeing just the bottom line present value of your future benefits or (2) listing the value of each monthly benefit (which will show you the gradual loss in value your benefits suffer over time).
If you need a more advanced calculator that includes past due benefits (with interest), annual cost of living adjustment calculations, and fees and costs, use this advanced lump sum calculator on my blog.
The formula used to reduce each future monthly benefit to present value is as follows: PV = MB/(1 + DR/12)^NM, where:
- PV = Present Value
- MB = Current Monthly Benefit Amount
- DR = Discount Rate (expressed as a decimal, e.g. 4% = .04)
- NM = Number of Months into the Future Before Payment is Due