When preparing for settlement discussions, counsel and adjusters alike often turn to one or more of McKellar’s valuation tools.  Is it better to use a present value calculator or an annuity cost to determine the settlement value of a file?  While both options are provided at no cost to our clients, there are different advantages to each tool.  Below are some points to assist in determining which tool will best meet your needs.

Present Value Calculator – the “Fast and Easy” Approach

Whether you are using the McKellar app, online calculator or the tried and true slide rule, all of these tools will provide a very quick “present value number” for a future payment obligation.  In any form, the benefit of the present value calculator is its ease of use, flexible discount rates (chosen by the user), and instant results.  Having the ability to calculate these present values on the spot can help bridge the gap at mediations and settlement meetings between economic loss reports which are not easily adjusted, and which may have used vastly different discount rates.  It also allows parties to consider multiple permutations of future needs in “real time” within a negotiation discussion.

Present value calculations, however, are limited in their precision.  While the calculator does not lie, it requires you to make assumptions about the rate of return on the lump sum, the impact of inflation on that anticipated rate of return and the claimant’s date of death.  An incorrect assumption could mean the resulting value is either too high or too low.  No matter how skilled an evaluator you are, you have no choice but to make an educated guess about these three things, and the opposing party might well disagree with one of your assumptions.

Annuity Cost Valuation – the Most Precise Approach

An annuity cost valuation, also referred to as a structured settlement quotation, on the other hand, requires more advance preparation. You must reach out to McKellar prior to settlement discussions and provide us with some preliminary detail about the client.  The resulting value we provide represents the cost of a product that can actually be purchased to fulfill an insurer’s obligations into the future.  The fact that it represents a real market product means it provides you with a value that is much more precise than the present value calculator.

Clients often request annuity quotations in SABS cases based on a weekly IRB obligation or a medical/rehabilitation burn rate into the future, but it can also be used to calculate the cost of a settlement with more general assumptions.  Because the design possibilities are endless, the structure quotation can replicate any possible scenario.  For example, if a claimant requires $1,000.00/month, indexed at 2%, plus $30,000.00 every seven years for a replacement vehicle, McKellar can provide the exact cost to provide those payments either to a fixed date or for a lifetime – with no need to guess about life expectancy.  Whether that annuity is ultimately purchased or not, the parties can be assured they are using the most precise current market value to produce a payment stream, without worry about market fluctuations or the rate of return on investments.  These valuations can certainly be provided in “real time” at a negotiation, but it requires you to arrange in advance for a McKellar representative to be available.  If you would like some annuity calculations in advance of the negotiations, you ideally want to allow some lead time for McKellar to prepare the appropriate costings.

Still Have Questions About Which Approach is Best?   

We are always just a phone call or email away.  Should you wish to discuss either of these strategies further, we are always happy to discuss your specific situation in greater detail. 

ABOUT SUMITRA LAGOO

Before joining McKellar, Sumitra practiced personal injury law in Hamilton for 15 years.  Her legal and client relation skills will continue McKellar's tradition of unparalleled client service.  To learn more about Sumitra, check out her bio here, or contact her directly here.