A well-developed settlement plan can be a win-win for all parties to a workers’ compensation claim. The injured worker is assured of having enough money to meet his future medical – and possibly other – needs for a lifetime; the employer/insurer gets the long-term claim off the books with the knowledge that the employee will be financially set.
Several elements are imperative in designing a settlement that is fair to all parties involved, such as:
- Structuring the Medicare Set Aside, to ensure Medicare’s interests are addressed
- Properly projecting medical costs, to ensure the worker has enough money to pay for future care related to the injury while also making sure what is included is appropriate and not inflated
- Pricing out future prescription drug costs
- Providing a system of ongoing support after the settlement, such as professional administration
Another vital component to is make sure the injured worker has enough money while also avoiding unnecessarily high costs is the life expectancy of the injured worker. It’s a factor used to determine the settlement amount.
Life Expectancy and Age Ratings
Structured settlements are a component of a comprehensive settlement plan, and vehicles that provide periodic payments agreed to by the parties. They are money streams from annuities that guarantee future payments according to a determined schedule issued through life insurance companies.
As with life insurance, life expectancy is a prime consideration in determining a realistic amount. Imagine a 35-year-old person in good health who applies for a $50,000 life insurance policy, compared with a 50-year-old who applies for the same policy. Chances are the 35-year-old will live longer, and pay premiums, far longer than the 50-year-old. The insurance company, therefore, charges a higher premium to the 50-year old than the younger person. Annuities for structured settlements are figured in the same way.
But ‘life expectancy’ is not solely dependent on a person’s chronological age. It is an estimate of longevity that also includes such things as family history, the absence or presence of high-risk activities, and comorbid conditions. The 35-year-old who smokes, has diabetes, and heart disease may have a shorter life span than a 50-year-old who is physically fit and takes care of himself.
There are many actuarial tables and ways to determine life expectancy. It is not, however, an exact science. Therefore, a person’s life expectancy may have many different estimates from different actuaries.
A realistic settlement amount should include an appropriate estimate of a person’s life expectancy. If the payments need to cover a shorter life expectancy, the cost of the benefits will be less than for someone with a longer life expectancy.
Life insurance underwriters can calculate life expectancy using medical records, address, and comorbidities. Because the process is not exact, structure settlement companies typically reach out to multiple life insurance companies for rated ages.
Any workers’ compensation claim being considered for settlement should include rated age estimates. It’s important to note that comorbidities that may impact life expectancy need not have any association with the person’s workplace injury. It is simply a medical assessment of a person’s life span.
Let’s say the life expectancy of an average male is 77. So a 50-year-old in good health would have a life expectancy of 27 years. However, if that person has hypertension, alcohol abuse, and other physical issues, he may have a life expectancy of just 15 years. That would eliminate 12 years from the expectation of future medical and indemnity costs in the settlement.
For another, more specific example, let’s take a 22-year-old male with a myriad of comorbidities. Where the ‘normal’ life expectancy would be 55 additional years, let’s say it is reduced to 30 additional years. When calculating the reserves and future cost projections, 25 years are eliminated from the settlement value.
Using Rated Age Information
Armed with various rated-age estimates, the settlement can be figured in several ways:
- Reduce the settlement amount. A settlement based on 34 years life expectancy would be much less than 57 years. So, a lower, more reasonable amount can be proposed to the injured worker.
- Limit the exposure. This is a strategy payers can use to lower their risk. Rather than offering a lower amount, the proposed settlement says that if the injured worker passes away within a certain timeframe, an annuity will be refunded to the employer/insurer.
- Don’t settle. If the rated age is significantly different from the normal life expectancy, it might make more financial sense for the payer to continue providing benefits for the injured worker’s lifetime.
Settling a workers’ compensation claim can be a complex process. It must be enough to give peace of mind to the injured worker and be affordable and realistic enough for the payer. Getting realistic estimates of a person’s life expectancy can result in a profound difference in the amount that is actually needed.
Author Michael Stack, CEO Amaxx LLC. He is an expert in workers’ compensation cost containment systems and helps employers reduce their workers’ comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is a co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder & lead trainer of Amaxx Workers’ Comp Training Center.
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