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Determine
Initial Payment | Determine Future Payments
Discount Future Payments | Discount
for Proability of Living
Add All Discounted Future Payments | Programming
Considerations
Examples | Conclusion
3: DISCOUNT EACH FUTURE PAYMENT FOR
INTEREST
Now the amount of the payment and its due date is known from the above
sections.
The present value of that payment needs to be determined. The present
value is the
amount of money that is needed to invest at a particular interest
rate such that the
future payments can be made. The present value of a future particular
payment is:
Where: m = 26.08875
t = number of two-week period
i = annual interest rate
PV = present value of $1.00 per week or $2.00 per 2-week period
This formula is based upon payments made every two weeks.
An interest rate of 3% is to be used for calculations of present value
in workers compensation. LC 5101 states,
“The amount of the lump sum shall be determined
as follows:
(b) If the injury causes permanent disability or death,
the appeals board shall fix the total amount of the permanent
disability payment or death benefit payable therefor in
accordance with Chapter 2 of Part 2 of this division, and
shall estimate the present value thereof, assuming interest
at the rate of 3 percent per annum and disregarding the
probability of the beneficiary's death in all cases except
where the percentage of permanent disability is such as
to entitle the beneficiary to a life pension, and then taking
into consideration the probability of the beneficiary's
death only in estimating the present value of such life
pension.”
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Example: Weekly rate of $800.00 per week. Interest
rate 3% per annum.
The PV of the first payment is $1,598.188. The PV of the second payment
is
$1,596.3784. The PV of the 10th payment is $1,581.9744.
The above formula is programmed as:
PV = 2*(1/(1+.03)^(1/26.08875))^t
Where t is the number of 2-week periods. Number of weeks is 2 x t.
Table 7 shows the present value of each payment for a 40-week period.
Table 7. Calculation of discount for interest
After 40 weeks of a payment of $1.00 per week or $2.00 every two weeks,
the
present value due to interest is $39.5278. This matches Table 1 of
the
Lexus-Nexus labor code section Tables and Schedules.
Example: Date of birth 1=6/1/1957; date of injury
1/1/06; payments start on 6/1/07;
date of commutation 6/1/07; weekly earnings $2000.00 per week. The
maximum
earnings results in a maximum payment of $881.65. The 20th payment
is due on
10/18/07. The discount factor for the 20th payment is 1.955189. The
present value
of the 20th payment would be 1.955189 x 881.65 x 2 = $1,723.79. The
present value of all 20 payments would be $34,849.68. Note that this
is less than the payout value
of all payments, which would be 881.65 x 2 x 20 = $35,266.00.
It should be noted that Microsoft Excel has a financial function that
uses the formula
given above that is basis of this program. However, the Excel answers
are not
accurate enough to be useful. The differences are sometimes significant.
The results of using the method described here match exactly the commutation
table in the LexisNexis labor code Table 1.
The question may arise as to whether the discount for interest very
nearly offsets
the increase for SAWW. The answer is yes if both interest discount
and future
SAWW percentages were equal. They would very closely cancel each other.
But the
answer is no if the interest is 3% and the future SAWW is 4.7%. The
increase for
SAWW is far greater that the interest discount. The adjustment of
present value for
interest discount and SAWW cannot be ignored.
For a life pension LC 5101 requires that the probability of the beneficiary’s
death be
taken into account in determining the present value of the benefit.
This is done in
the following section.
Determine Initial
Payment | Determine Future Payments
Discount Future Payments | Discount
for Proability of Living
Add All Discounted Future Payments | Programming
Considerations
Examples | Conclusion
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Present Value of
Total Permanent Disability
For Date of Computation in 2007
Warren Schneider and Stephen Schneider
Med-Legal, Inc.
In this article we discuss the problems and pitfalls
of Present Value.
