Present Value of Future Benefits
What is Present Value?
The “present value” of future benefits is important when dealing with “lump sum” settlements. The concept of “present value” means that a lump sum settlement today is worth more than it will at some time in the future. The process of adjusting for that is to “discount” future benefits to their present value.
There is a formula to calculate present value of future benefits, which is:
PV = (FV)(1+i)ᵑ, where PV is present value, FV is future value, i is the interest rate, and ᵑ is the number of compounding periods per year.
Even simpler is to go to a web site that does this calculation for you. http://www.moneychimp.com/calculator/present_value_calculator.htm
All present value calculations are based on the principle of the time-value of money (TVM), which assumes that (a) if you have a dollar today, it can be invested and can earn interest going forward, and (b) that inflation will decrease the value of that dollar in the future.
Example of Present Value Calculation
Assume that your client is disabled and is now 55 years of age. You have just settled your client's long-term disability case. Your client's monthly earnings are $10,000 and therefore the monthly benefit is 60% or $6,000 per month. Further assume that while waiting for the case to settle, your client has accumulated past due benefits (from the date of disability to the settlement date) in the amount of $10,000. The benefit period under the Policy runs to age 65 or for 10 years from the date of settlement. Therefore, future benefits (from the date of settlement to the end of the benefit period) are $6,000 per month for 120 months, or $720,000. Applying the present value formula at an interest rate of 1.96% results in a present-day value of $592,972.
In other words, investing $592,972 at the time of settlement at 1.96% interest for 10 years will accumulate to $720,000 in future benefits.
Total Benefits, including past due benefits and the present value of future benefits, in our example are $602,972.
In summary, the calculations look something like this.
Monthly earnings $ 10,000
Monthly benefit at 60% $ 6,000
Past due benefits $ 10,000
Benefit Period until age 65
Future benefits $ 720,000
Present day value of future benefits $ 592,972
Total benefits (past due + present day value of future) $ 602,972
Interest Rate Assumptions
The interest rate assumption you use in calculating present value will determine the discounted value. The higher the interest rate, the steeper the discount to present value. The interest rate used in the above example is based on a Treasury Note rate of 1.96%. Insurance carriers often favor using Moody's Seasoned Aaa Corporate Bond Yield, which may be 2.94%, or something similar.
Be aware that with a higher interest rate, the present-day calculations will result in a lower present-day value of future benefits. It's something to consider when negotiating with the insurance carrier.
Commissioner's Standard Ordinary Table
Insurance carriers use the Commissioner's Standard Ordinary Table (“CSO Table”) to determine and adjust for a client's life expectancy at any given age. Insurer's may discount the value of future benefits based on a client's age and health issues. However, if your client is a non-smoker, who has no life-threatening medical conditions, and is projected to live beyond the Benefit Period, then it would be improper to apply an adjustment for that.
Social Security Disability Benefits
You may need to consider the value of SSDI benefits, if your client has either been awarded benefits or is eligible to receive them and offset those benefits in the calculations. Or, negotiate them away.
Attorney's Fee Award
While an award of attorney's fees and interest is discretionary under 29 U.S.C. § 1132(g), there is a presumption in favor of a fee award to a successful ERISA plaintiff in the 9th Circuit, “unless special circumstances would render such an award unjust.” McElwaine v. US West, Inc., 176 F.3d 1167, 1172 (9th Cir. 1999) (ERISA should be liberally construed to further the statute's remedial purpose); Perryman v. Provident Life & Accident Ins. Co., 690 F. Supp. 2d 917, 955-956 (D. Ariz. 2010) (spelling out the 5-factors test.); Hummel v. SE Rykoff & Co., 634 F.2d 446, 453 (9th Cir. 1980).
If your client is a prevailing party, you can request permission to make an Application for an Award of Attorney's Fees under Local Rule 54-10, including both pre- and post-judgment interest under 28 U.S.C. § 1961. Blankenship v. Liberty Life Assurance Co. of Boston, 486 F.3d 620, 628 (9th Cir. 2007).
Absent “special circumstances,” attorney's fees are likely to be awarded to a successful ERISA plaintiff and may also be a point for negotiations.
Value of the Case
What is the “value of a case” for settlement purposes? Although settlements may theoretically result in putting the plaintiff “back on claim,” a settlement often takes the form of a lump sum payment.
What should that lump sum payment be? The starting point is “Total Benefits” (past due + present day value of future benefits) reduced by a certain percentage that both sides can live with. If a plaintiff can negotiate a settlement that pays 70% or more of Total Benefits, that can be considered a good outcome. We have seen settlements down to as low as 40% of Total Benefits (or even lower).
An insurer is not likely to settle a claim for full value. It would probably go to trial, figuring it has nothing to lose, unless a trial would be a ‘slam dunk' for plaintiff. While an insurer's attorney's fees are usually considered a cost of doing business, plaintiff's attorney's fees may be a “added” to the value of the case, especially if plaintiff has a strong case.
That's part of the negotiation process.
At Law Med, we are knowledgeable and experienced in ERISA claims and settlement negotiations.