"Attention, Settlement Shoppers . . . "
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I still can hear those loudspeaker announcements. You know, the ones in retail stores advising of some “special deal” made available only to the “lucky few” who happened to be in the store at the time of the announcement. Now, the deal wasn’t really all that “special”, because if you weren’t in the store at the moment they announced it, all you had to do was hang around for another half hour when they announced it again. The key to the savings was knowing that these kinds of pricing discounts existed and knowing what you had to do to capture them.
How does this apply to settlement negotiations? Simple: reduced life expectancies impact the value of settlement offers, sometimes to a remarkable degree. We can greatly increase the value of offers without increasing their cost in cases where the injuries or health condition of the claimant may potentially reduce life expectancy. Bear in mind that the condition need not be related to the claim at issue - persons with diabetes or hypertension often qualify – but it must be a documented condition from which the claimant still suffers.
The easiest way to understand what’s going on here is to bear in mind that annuities are the opposite of life insurance: instead of paying when you die, life contingent annuities pay until you die. Ergo, the shorter you live, the fewer payments an annuity issuer must make. Fewer payments equal lower cost.
A recent case provides a good example. An infant claimant born in 2003 was severely injured while he was very young. Standard life expectancy tables for a three-year-old male project a life expectancy of approximately 73 years. You might therefore conclude that a lifetime annuity expects to make payments for 73 years and you would be right.
This is the very risk factor that life insurance companies use to calculate how large a payment they can deliver for a given amount of money. They further reduce this risk by spreading it out over many thousands of similarly aged annuitants. In other words, the odds that they will have to pay longer than 73 years in one child’s case is offset by the odds that another child will not live the full 73 years. It’s an average and sure enough, one half of the risks offset the other.
In this case, the underwriters at the life companies believe that this three-year-old infant has the life expectancy of a much older man. After submitting the claimant’s medical records to the underwriters, we secured adjusted life expectancies equivalent to males aged over 50. In fact, the child’s condition is so severe that one of the annuity markets “rated him up” to the life expectancy of a 77-year-old man*. That means a life expectancy –and consequent potential payment duration - of approximately only 10 more years.
What does this mean to the value of the case? The child’s severe condition is already a real wild card in negotiations. On the one hand, his annual cost of care is very high (projected in one life care plan to exceed $12,000 a month for life) and he might live a long time. Under that scenario, the value of the case could be huge. However, on the other hand, it’s also possible that he won’t live more than a few years, thus drastically reducing the value of this one element of damages. The prospect of facing decades of high medical expenses means the claimant’s family can not accept a low settlement offer; but by the very same risk, neither can the defendants offer a fortune, knowing that it may only be needed for a few years and then unjustly enrich non-injured relatives.
Here’s where the medical underwriting helps. While neither of the litigating parties knows how long this particular child will live, it no longer matters. They can both lay the life expectancy risk off on a life insurance company who will guarantee the payments for life, no matter how long that is. It closes tremendous valuation gaps between the negotiating parties and regularly helps settle cases that were intractably stuck on the issue of cost of future care for claimants with uncertain life expectancies.
Coming back to the case cited earlier, the cost to provide the full $ 12,819.47 per month for life cited in the infant’s life care plan using standard pricing for a three-year-old boy would cost $2,965,912. Enter the rated age discount factor (77-year-old male), and this same stream of benefits now costs $1,499,500. Medical underwriting just cut the valuation gap in this case by half.
To obtain such discounts, we need to provide the underwriters with copies of medical records pertaining to the claimant’s past and current medical condition. And remember: the claimant’s medical condition need not have anything to do with the claim at hand. Pre-existing conditions are fully acceptable, indeed they are important to consider.
Armed with this data, we can apply for adjusted pricing and obtain whatever discounts the annuity “markets” deem appropriate. As in the case I discussed above, depending on the severity of the condition, the size of these discounts can be substantial.
Do you have a case involving someone with a potentially reduced life expectancy? Interested in finding ways to maximize benefits payable to that individual? Call Frank C. Kilcoyne CSSC at 800-544-5533. I am here to help.
*“Rating up” means moving a given claimant up the age scale for pricing purposes. A three-year-old “rated up” to age 50 means their future benefits may be calculated using the price assumptions normally reserved for healthy 50-year-olds.
