Greetings, we often use the term Present Day Value or have an MSA funded via an annuity, but we don’t often pause to think what those terms mean. I promise this will not be too math-y.
It is all about putting money in the bank it earning interest as you make payments.
- When we are valuing a PTD claim that will pay a claimant until age 65, it is pretty easy to figure out the full value. Figure out how many years till they turn 75*, and then multiply the number of years x 52 weeks x the compensation rate is the base PTD owed.
*unless they are over 70 at the time of the accident, then they get 5 years of PTD
Also, the claimant would get PTD supplemental benefits of 3% a year increase on the compensation rate until age 62 (in most cases). If the claimant is PTD they should qualify for Social Security Disability, so there is an offset as well till age 62 in FL. It doesn’t always equal out but sometimes the SS Offset and the PTD supps cancel themselves out in dollars, we can calculate that all for you.
However, you don’t need to reserve for the full value. Present Day Value means how much do you have to put in the bank today, at say 4% interest, that will cover the PTD payments till 75 so at the end there will be $0 left. The going interest rate today is about 4%. So if your future PTD full exposure is $100,000 on a 65 year old, you may only need to put $85,000 in the bank as a reserve because that money will earn interest every month as you pay out the bi-weekly PTD payments.
- An MSA in an annuity is basically the same concept, the annuity company invests the money you pay out now to buy the annuity. If your MSA is $100,000, and you use an annuity, there are two pieces. The quote will give you your full cost of the annuity, say $85,000 that will payout $100,000 eventually. The annuity will have a seed amount, which in English just means the first payment to claimant. Let’s say in this example the seed payment is $10,000, and then you send a check for $75,000 to the annuity company. Each year, the annuity company will send the claimant a check for $10,000, until they have paid out the full $100,000 (including the seed payment) but it only cost you $85,000.
****Join us for our 2nd Tips and Tricks of the Month 30 min webinar on 11/3 for 30 minutes at 11:30. I promise, no math! Email EG@eraclides.com for the registration link.
Sincerely,
Morgan Indek | Managing Partner