Lost Years Maybe, Lost Care – Never

by Heber G. Smith

This article was originally published in the spring 1997 issue of the Expert Witness.

Whilst the debate over methodology of compensation for the “Lost Years” may rage on, there does exist a simple solution for providing care for a claimant whose injuries (or for that matter, other health ailments) may result in a diminution of life expectancy.

Compensation for the cost of future care of an individual whose life expectancy is demonstrably impaired, need obviously be less than that required for someone whose anticipation of a future lifetime is normal. But who is to say that he or she will live that long? What happens if he/she lives longer?

On the flip-side of the life insurance industry’s practice of “rating-up” or declining an unhealthy applicant for life insurance, some insurers have a practice of improving the income provided by a fixed premium for an annuity applicant deemed by the insurance underwriters to have little likelihood of living to a normal life expectancy. The results of this practice may reduce dramatically the cost of providing “guaranteed-for-life” future care. Cases involving severe injuries have lead some insurers to rate-up prospective measuring lives (the person on whose life the payments are determined) by as much as and in some cases more than 50 years. As one might imagine, the saving inherent in providing lifetime payments for a 65 year old claimant as opposed to a 15 year old can be consequential.

To further reduce the cost is the flexibility that Revenue Canada confers on the structured settlement annuity. Since the casualty insurer is the owner and beneficiary of the supportive annuity and since paragraph 1400(e) of the Income Tax Regulations governing reserving taxation of insurers permits the tax free ownership of the annuity, it is possible to purchase more than one annuity to support the periodic payment stream. This permits the structured settlement annuity broker to ferret the most favourable components of a required stream from a number of companies; i.e. select the most favourable interest rates from one or more companies and the most favourable (negative) life expectancy offering from another.

Revenue Canada now permits a new twist in it’s heretofore “irrevocable and non-commutable” requirements under IT-365R2. Upon the death of the claimant the cost of future care payments under a structured settlement need not vest indefeasibly in the claimant’s estate. Since the death of the claimant negates the need to provide for care, Revenue Canada now takes the position that the future guaranteed payments may revert to the defendant insurer and that the insurer may commute those payments. Comforted by the fact that it may recover a significant percentage of its cost of future care outlay, the insurer may be somewhat more favourably predisposed to negotiate other components of the action.

Very seldom do people die at the “right” time. The problem becomes magnified in respect to a personal injury action since the defendant may overcompensate a victim that dies too soon and a victim that lives too long may find him/herself without adequate resources to provide for care at an age when it may be most imperative to so. The annuity is truly a no-waste solution.


Heber Smith is the principal of Smith Structured Settlements Inc. a structured settlement and annuity brokerage with offices in Calgary and Vancouver. He is also a partner in Structured Settlement Software, a firm that provides tax driven software to the American structured settlement industry.