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Rated Ages Provide Better Payouts

Injury victims face many options with their settlement proceeds. Often, the attorney representing the injured party serves as a sounding board and advisor for these decisions. The structured settlement annuity bears a low rate of return but is often recommended because it is guaranteed, the proceeds are excluded from income taxes, it is free of care, and difficult to dissipate. However, the primary advantage of using a structured settlement often is the benefit provided by a rated age.

To obtain a rated age (sometimes called an age uprate) medical underwriting must be performed. Many attorneys and judges are not familiar with the benefits of medical underwriting. The most relevant, compelling and up-to-date medical information is sent to the insurance companies that may write the annuity. Usually within 24 hours, their doctors review the medical information and provide a rated age offer. The rated age (instead of the actual age) can then be used to obtain the annuity costs. In some cases this makes a dramatic difference. A market survey of annuity costs can then be performed to identify the company with the best rate. Essentially, the insurance companies must compete with each other not only on interest rates but also on the age uprate.

The rated age is based upon the life expectancy of the injury victim. It's morbid to contemplate, but any serious injury impacts a person's life expectancy to some extent. So the object of the settlement planner is to show evidence to the insurance underwriters of any condition that negatively impacts life expectancy. These conditions may be the result of the injury giving rise to the lawsuit or may be totally unrelated. Of course, a higher age uprate results in lower premiums to provide a given future life-contingent cash flow.

The advantage of a favorable rated age can be illustrated with an example. Amy is a sixteen year old female who suffers an accident resulting in brain injury and quadriplegia.  Amy receives a rated age of 57. Her life care plan projects an annual cost of $103,000 increasing at a rate of 35%. If she had not qualified for a rated age this annuity would cost approximately $3,700,000. However, due to the rated age, the actual cost of this annuity is only $2,100,000. So obtaining the rated age saves her $1,600,000.

It is not an uncommon mistake for people to focus on the rate of return on a structured settlement annuity even when a large age uprate is involved. In the example above, would Amy be better off if her advisors took a net settlement of $2,500,000 and invested it in a portfolio of securities with an expected rate of return higher than that provided by the structured settlement? Compare these two options. Option 1: $400,000 is invested in a trust for Amy's benefit and the rest ($2,100,000) is used to fully fund her life care plan in the structured settlement annuity. Option 2: $2,500,000 is invested in a portfolio of securities with no structured settlement. An analysis of these two options shows that the return on the assets is unlikely to be able to sustain the projected withdrawal rate. In fact, there is a very high probability that the money will run out before Amy dies. A decision not to structure a large amount of a settlement when a large age uprate is involved could lead to a liability exposure for the attorney ad litem and the plaintiff's attorney.
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