How a Lump Sum Compensation Award Is Affected by Life Expectancy

Receiving a lump sum compensation payment sounds straightforward. But the number on the cheque is not simply the total of what someone would have earned or spent on care each week, added up over their lifetime.

A lump sum is a present-day equivalent of a future stream of payments. Calculating it accurately requires two things: knowing how long that stream of payments needs to last, and knowing at what rate the invested lump sum will grow over time.

Life expectancy determines the first of those two inputs, and it has a direct bearing on the final figure.

The Mechanics of a Lump Sum Calculation

When a court or a settlement determines that a plaintiff requires, for example, $800 per week in future attendant care for the rest of their life, the question is not what $800 multiplied by 52 weeks multiplied by the remaining years equals.

The question is: what single amount, invested today at the applicable discount rate, would generate $800 per week in real terms for the plaintiff's expected remaining lifetime?

This present value calculation combines the weekly loss figure, the discount rate, and the applicable multiplier derived from the life expectancy. Multipliers for various life expectancy periods at different discount rates are set out in actuarial tables and used routinely by forensic accountants.

The Impact of Life Expectancy on the Multiplier

The multiplier used in a present value calculation increases as the assumed life expectancy increases, but not in a linear way. This is because of the compounding effect of the discount rate.

For shorter periods, adding one or two years of life expectancy has a more pronounced effect on the multiplier. For very long periods, the marginal effect of additional years diminishes.

As a practical example, using a 5% discount rate, the multiplier for a 20-year remaining life period is meaningfully lower than for a 30-year period. Adding a further 10 years increases the multiplier again, but by a smaller proportion than the previous 10 years.

The Effect in High-Value Claims

In serious injury matters involving substantial ongoing care needs or a long period of future income loss, even a modest change in the assumed life expectancy can produce a significant shift in the lump sum.

Consider a plaintiff with a weekly future loss of $2,000. At a 5% discount rate, the difference in present value between a 25-year and a 30-year period is tens of thousands of dollars. At a 3% discount rate, the difference is even larger.

For younger plaintiffs or those with longer care periods ahead of them, life expectancy is one of the most sensitive variables in the entire calculation.

Reduced Life Expectancy

It is also worth noting that some injuries can reduce a plaintiff's life expectancy below what the standard tables would suggest.

In spinal cord injury cases, severe brain injury matters, or claims involving progressive conditions, medical evidence may establish that the plaintiff has a shortened life expectancy. In these cases, the forensic accountant will apply a reduced period to the future loss calculation, which can decrease the total lump sum compared to what a standard table would produce.

This is an area where close collaboration between the forensic accountant and the medical experts is important.

The Role of Forensic Accounting

At DB Forensic, we do not determine life expectancy. That is a matter for medical evidence and actuarial assessment. But we apply the appropriate life expectancy to the present value calculation precisely, using the correct discount rate and the correct multiplier tables.

We clearly state the source of the life expectancy figure used, the discount rate applied, and the resulting multiplier, so that every step of the calculation is transparent.

Preparing a Future Loss Assessment

If you are working on a matter where future loss is a significant component of the claim and want to make sure the life expectancy inputs and present value calculations are correctly applied, DB Forensic can help.

Talk to DB Forensic About Your Future Loss Assessment