What is Workers' Compensation?Workers Compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue their employer for the tort of negligence- Wikipedia
Workers Compensation and Structured Settlements
Payments can be customized
. There are different types of payment streams
that can be tailored and combined to meet a workers' compensation claimant's current a future needs
Structured settlements offer protection against future loss or dissipation of funds. Workers compensation structured settlement payments are very difficult, if not impossible to sell to factoring companies in most states. People don’t have to be concerned with making a single payment last a lifetime.Tax benefits
: Payments received in the settlement of physical injury cases are completely tax-exempt at the federal and state level, except for punitive damages. In contrast, investment earnings from all-cash settlements are generally taxable.
Capital protection: Unlike traditional investments, which can lose money with the fluctuation of financial markets, structured settlements provide protection from economic uncertainty in an unpredictable economy. They are funded with annuities from major life insurance companies or U.S. Treasury obligations.
Low risk: Going to trial involves significant risks to all parties involved, and the time and expense of litigation can be a significant burden. Structured settlements allow the parties to author their own futures without the unpredictability of a trial.
Professional money management: Each highly-rated financial institution has a team of professionals to manage the assets in a structured settlement.
No fees: There are no ongoing fees for administration, management or transactions, and no fees for the consultation of structured settlement experts
Both self insured corporations and workers compensation insurers have the opportunity to benefit from significant administrative and financial gains from transactions in the area of Workers Compensation permanent partial and permanent total claims, assisted through specific structured annuity/insurance products made available to you by 4structures.com, LLC.
The basic premise of this approach is taking an existing statutory benefit and funding it with a structured settlement annuity, at less than the cost of the current reserve, with a concomitant reduction in balance sheet liability. It is an alternative to an all cash settlement under a Compromise and Release (C&R)
Furthermore, where it is not possible to settle a worker’s compensation claim, a state fund, pool, casualty company or self-insured can simply purchase an annuity to fund the long term indemnity payments. Structured settlement annuities are able to match the payment streams required by state statutes. This usually avoids the need for special regulatory approvals to change the payment pattern.
In some cases, medicals may also be funded in this manner, particularly in conjunction with a Medicare Set Aside where a Structured MSA may reduce the cost of the MSA.
What types are cases are best for a workers compensation structured settlement approach?
- Questions concerning compensability and liability have been determined.
- The claimant has stabilized medically and degree of disability and/or permanency can be accurately determined.
- There is a high probability that payments will continue at least 10 years into the future.
By adopting a strategy of funding Worker’s Compensation claims with the above mentioned characteristics, a number of financial benefits can be secured.
1. Mortality risk is transferred to a life insurer. Writing structured settlement annuities on a life contingent basis can eliminate reserve deficiencies arising from poor mortality forecasts.
A life insurer’s actual mortality experience tends to be more predictable due to a large pool of risks. However, reserve adjustments related to medical expenses and other factors may still be necessary. To the extent annuity financing reduces adverse reserve development it will also stabilize future earnings.
Mortality Based Discounts(MBD’s) are applied when, in the underwriters determination, an individual’s life expectancy is shorter due to a disclosed medical condition. Of significant interest is that a ratable condition need not be related to the claim being filed. A "rated age" will significantly bring down your firm’s cost of a life contingent payment stream. The use of rated ages and mortality data is a major advantage of structured annuities. IMPORTANT! both industrial and non-industrial medical conditions that may reduce the applicant’s life expectancy in the view of the life insurance company that provides the annuities for the workers compensation structured settlement. This may reduce the cost of the Medicare Set Aside Allocation making it easier for a case to settle.
2. Investment and reinvestment risk is transferred to a life insurer. In a sense, all non-fatality worker’s compensation claims can be divided into two groups. Short-term claims constitute the largest group in terms of numbers of cases and represent a significant portion of claim debts. These short-term liabilities match up nicely with the short duration assets of the typical casualty company or pool.
The next group of claims is made up of long-term claims. These long-term liabilities are not well matched with the short duration assets of the typical casualty company or pool portfolio. Purchasing annuities to fund these long-term claims provides a better matching of assets and liabilities. This is a cost effective strategy since the Capital requirements and long-term investment strategies of life companies allow them to price annuities competitively compared to assets of similar quality and duration.
3. Administrative expenses can be decreased through the structured annuity or reinsurance financing mechanism. Payments can be made directly to the claimant by the life insurer, relieving the obligor of this burden. Some annuity issuers can make payments on a weekly or bi-weekly basis.
4. Compromise Settlements and Redemptions
- Since the Tax Payer Relief Act of 1997 qualified assignments under IRC Section 130 have been permitted for compromise settlements and redemptions. Qualified assignments may provide additional financial security to the payee, particularly if the structured settlement annuity issuer is of greater credit quality than a self insured employer or workers compensation insurer..
- Several others provide a reinsurance approach to finance both statutory obligations and compromise settlements.
- Several companies have created special endorsements that provide for the commutation of the funding asset upon the cessation of the statutory obligation. (e.g. remarriage of a widow or widower)
How Do We Begin?
Following is a brief checklist of the items needed to underwrite and price an individual or group workers compensation transfer utilizing the approaches covered above.
- Name of Claimant and Social Security Number
- Date of Birth
- Type of Injury
- Date of Accident
- Monthly or Bi-Weekly Payment desired?
- Annual Medical Costs, if any
- Applicable State COLA, if any
- Current Reserve Amounts by claimant
For life contingent cases, current medical records or an Independent Medical Evaluation(IME) will be required to be eligible for the Mortality Based Discount (MBD)