Structured Settlements FAQ

Structured Settlements FAQ

Frequently Asked Questions About Structured Settlements

Q.  What is a structured settlement?
 
A. A structured settlement is an important financial tool available to parties in litigation that provides core income stability with tax advantages. For more information on structured settlements and how you get one, please click here.  A structured settlement is commonly referred to by structured settlement consultants, settlement planners, lawyers, judges, structured settlement annuity issuers and insurance company claims adjusters by the slang word "structure" or in plural "structures".
Q.   What exactly is Present Value in relation to a settlement offer? The carrier is making structure offers by quoting present value but won't tell me the cost.
 
A.  Present Value ("PV") is merely an attempt to calculate a value to future payments in today's dollars. The mathematical calculation that is used in determining present value is dependent on the interest assumption (discount rate), which could be entirely arbitrary or could be based on an average. A difference of a percentage point could make a major difference in present value, possibly hundreds of thousands of dollars! 

Present Value offers are approximations. Should you rely on it to settle your case, without knowing the assumptions, you won't really know what you are settling for. Consequently, you could end up inadvertently violating your contingency fee agreement by taking more than your share of the proceeds. 

In Private Letter Rulings 8333035 and 9017011, the IRS ruled that disclosure by the defendant of the existence, cost or present value of an annuity will not cause one to be in constructive receipt of the present value invested in the (structured settlement) annuity. However, you may encounter one of the diminishing number of defense practitioners who will not disclose the cost, even today, because of the mistaken belief that such disclosure will result in constructive receipt. Today, more states are requiring disclosure for consumer protection. Florida, Massachusetts, Minnesota and New York have statutes requiring cost disclosure concurrent with the creation of a structured settlement.    

In 2017, it would be less likely that the cost of a structured settlement would not be disclosed. New York, Massachusetts, Florida and Minnesota structured settlement protection laws require cost disclosure concurrent with the creation of a structured settlement. The Florida and Massachusetts structured settlement protection acts further require a Present Value ("PV") disclosure. 

Watch John Darer's video podcast on Present Value at the 4structures1 YouTube Channel.

Q. How Safe Are Structured Settlement Annuities?
AThe life insurance companies that issue structured settlement annuities are some of the largest and well capitalized insurance companies in the world. Five companies that currently issue structured settlement annuities have been keeping their promises since the 19th Century. Another has been in business for over 100 years. And the parent of one of youngest of the companies, in business for 77 years, was named one of the Top 5 Most Admired Companies in the world by its peers in the 2017 edition of Fortune magazine’s annual survey. Watch John Darer’s video How Safe Are Structured Settlement Annuities?. Visit the Structured Settlement Annuity Company Museum

Once you know the rate, you can compare it to after-tax rates that you might earn by opting for other structured settlement plans, or that you might achieve by taking cash and investing in different taxable or tax-exempt financial instruments. Clearly the IRR is useful to help determine the best value for money while taking into account need for absolute certainty, available resources, tolerance for the investment risk of the alternatives, needs as to timing and amount of payments and other factors. 

Care should be taken by Plaintiffs and counsel to understand how the IRR is calculated in a structured settlement proposal where lifetime payments are being considered, and there is a plaintiff /annuitant with reduced life expectancy, so an effective comparison can be made. From time to time we see a competitor's or an annuity issuer's proposals showing a single high IRR on someone with a very high rated age (severely impaired life expectancy). When we perform our calculations they reveal that the proposal assumes that the annuitant lives a normal life expectancy ("NLE"). This could be unrealistic in and of itself. We are aware that annuity issuers' software calculates the IRR based on different mortality tables. As an example the 2001 Commissioners Standard Ordinary Mortality Table gives an unimpaired 40 year male 37.36 years to live (or to age 77.36) and a 40 year old female 41.03 years to live (or to age 81.03). Yet the IRR calculator of one annuity issuer that we are aware of had a to age 85 or age 86 life expectancy from which to measure the IRR for a 40 year old male. With a life contingent payout, an increase in the length of the payment period results in a higher IRR.

Despite the possibility that the annuitant may not live to NLE is reflected in the pricing of the structured settlement, the potential of a near term or intermediate term death is often not reflected in the IRR on some proposals. If your broker, or the person in his/her office creating the proposal, is simply transposing the numbers from an annuity issuer, with NLE mortality assumptions in their IRR calculator, the IRR numbers may be inflated and not useful for comparison. 

In cases with impaired risk annuitants we suggest running the IRR calculations at various milestones past the structured settlement's period certain through a standard NLE. Doing this should clean up the discrepancy that may exist between proposals of annuity issuers who may use different mortality tables in the IRR calculation tool within their software and also give the plaintiff, counsel and beneficiaries a better frame of reference.   

Q. What Do Periods of Lower Interest Rates Mean for Structured Settlements?
A. While interest rates factor into the decision, the main reason people do structured settlements today is not the interest rates, it’s the ability to provide core foundational income that is safe, secure and guaranteed. Even during periods of lower interest rates there is generally a wide spread between structured settlement annuities and treasuries as well as corporate bonds of similar credit quality. The tax leverage afforded by a structured settlement still applies. When the economy is slowing or the stock market is volatile, it is a wise allocation of a portion of your settlement recovery. Even in a growing economy those who cannot accept volatility in investment returns or have an absolute need for income will benefit from a structured settlement. Structured settlements offer peace of mind, safety, tax leverage and a competitive rate of return.

Alternatives such as "recycled structured settlements", which involve the purchase of structured settlement payment rights or multi-streams from the structured settlement secondary market may offer a possible complementary solution. Combining the cash flows from the two fixed income generating asset classes may present an efficient solution for the right claimant, or attorney, in a low interest rate environment. It's a sophisticated solution that may be worth exploring with caution . Make sure you are dealing with credentialed structured settlement advisor who can articulate a variety of settlement planning solutions. You will be glad you did. It is critical to note that recycled structured settlements or structured settlement derivatives are not annuities, despite mislabeling by some salesmen as “secondary market annuities”, and may not enjoy the same benefits offered by legitimate annuities.

Q.Why do females receive less lifetime monthly income from a structured annuity than a males of the same age and health status, and having the same annuity cost?
A. Statistics show that females have a longer life expectancy than males. Think of annuities as "income insurance". Since the period over which females are "insured" is statistically longer, it follows that the cost of that "income insurance" is higher. Thus the income per dollar of funding is less. The reverse happens with other financial protection products, such as life insurance, where the cost of insurance is less because a female has a statistically  lower mortality risk.
  
Q. What Happens to My Structured Settlement Payments If I Die?
A. Structured settlement payees can name a beneficiary if provided for in the settlement agreement. Typically written notice just be given to the annuity issuer or the qualified assignment company before a designation is effective. Minors cannot name a beneficiary so it defaults to their Estate until they reach the age of majority. In the event of death prior to the end of any guaranteed/certain period or when there are remaining deferred guaranteed lump sum payments yet to be paid, any remaining structured settlement payments will be made, when due to your named beneficiaries or your Estate, as applicable.

Important: While structured settlement payments to a named beneficiary bypass probate, the present value of any yet to be received certain structured settlement payments, or guaranteed lump sum structured settlement payments, may be part of the calculation of the decedent's gross estate used to determine if there is any estate tax liability.


A commutation rider is as an option however, that will serve to commute remaining guaranteed payments to a lump sum upon death. A structured settlement commutation rider is useful where the structured settlement is paying into a Special Needs Trust (in some jurisdictions the commutation rider may even be mandatory in order to receive Medicaid approval), where liquidity is needed to pay estate taxes, or in circumstances where it can be anticipated that beneficiaries would not benefit from an income tax free payment stream. A commutation rider must be set up at the time of settlement is finalized . The method of calculation of present value varies by annuity issuer. Some use the cost of an annuity which, as of the date of death and based on the annuity issuer's then current rates, could fund the remaining certain or guaranteed payments. Others use a discount factor based on a published bond index.  


Q.Can you do a structured settlement in a bad faith case where the plaintiff has suffered a physical injury?
A. In Private Letter Ruling 200903073 released on January 18, 2009, the Internal Revenue Service relying on the "origin of the claim" doctrine, determined that amounts received by an accident victim from the defendant's insurance company as part of an assignment agreement and a settlement agreement are excluded from gross income to the extent they are attributable to medical expenses, pain and suffering, and lost earnings. An exclusion from income under IRC 104(a)(1) or IRC 104(a)(2) is essential in order for there to be a qualified assignment (whether directly from the Defendant or Insurer, or from a qualified settlement fund  under IRC 130(c)(2)(D).  Click here to review a copy of the IRS Private Letter Ruling 200903073.

How does a structured settlement annuity compete in the current interest rate environment?

The primary reason people take structures is to provide a foundation of stable income.  Recent publications contend that longevity risk, the concern about outliving ones assets, which has always been the top concern of seniors, is also a concern of increasing numbers of people over age 45.

Structured settlement annuity yields remain competitive to other alternatives, even in cases where there is no lifetime payout. Even if you don't need lifetime income, a fixed income investment may be part of, or may have been recommended to be part of, your portfolio. A structured settlement can be established to model the payment flows of a fixed rate bond held to maturity, in which the instead of the issuer of a bond paying income to bondholder until maturity and then, the bondholder receives back the amount invested or principal, the structured annuity issuer pays the income and returns the principal as a deferred lump sum payment. Structured settlement payments are income tax exempt on cases where the payments represent damages for personal physical injury, physical sickness, wrongful death, wrongful imprisonment and workers compensation cases.

Use the 4structures® taxable equivalent yield chart to compare bond rates to the internal rate of return of a structured settlement, or the component cash flows within a structured settlement. You can also use the chart to calculate the net after tax yield of a taxable investment and compare it to the internal rates of return of a structured settlement.

Lifetime structured annuity payments, which may incorporate rated age pricing, may have even higher yields than bond simulation or fixed period certain structures. Unlike bond payments, structured annuity payments can be customized. For example, while bond payments are traditionally paid on a semi-annual basis, the structured annuity payments could be paid monthly, quarterly, semi-annually, annually or even bi-weekly! They can also be immediate or deferred and have increasing payments.
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