March 16, 2022
Anthony F. Prieto, Jr., CFP® & Samantha Webster
Since 1983, structured settlements have become a frequently employed solution to protect personal injury settlements for the benefit of injury victims and their families. Over time as structures became more prevalent, the plaintiff bar realized that for a structured settlement to have maximum benefit for the injury victim, it was necessary to have experts involved in the planning process for their clients. A settlement planning professional that works directly with the plaintiff can make sure that a plan is developed to meet the needs of the injury victim.
Structured settlements allow a personal injury victim to utilize an annuity to receive part or all of their recovery over time, instead of as a lump sum. There are many benefits of utilizing a structured settlement, including:
- Tax-free gains/interest
- Creditor/judgment protection
- Highly customizable payment plans
- Fixed and guaranteed future payments
- Cost of living adjustments (increasing payments)
Structured settlements also have some downsides, including:
- The payments are locked in and cannot be changed.
- The interest rate (rate of return) is locked and does not change.
- A court order is required to change or alter certain terms.
Over the first 30 years of the use of structured settlements, there was little to no change in the types of structured settlement annuities offered to an injury victim, and there were very few product enhancements or changes brought to market. In recent years, however, there have been some new innovative products and enhancements brought to the market. The remainder of this blog post will summarize a few of those offerings.
The first change was implemented by Pacific Life in 2014. Pacific Life created a index rider to a traditional structured settlement. The Index-Linked Annuity Payment Adjustment Rider, or ILAPA, is used to create a market-based cost of living adjustment (COLA) each year. Prior to this rider, a COLA was chosen at that the inception of the contract and did not change. A client could select to have a set increase on their payment. The percentage change was locked in and fixed over the duration of the periodic payments stream. For example, the injury victim could choose a 3% COLA. Each year on the anniversary date, the payment would increase by the specified percentage, compounded each term. The percentage would be locked and the future payments would be known. ILAPA offers another option for the increase. If the client chooses this option, the annual COLA is determined by the performance of an index. With Pacific Life, the index is the S&P 500. Each year the payment increases by the COLA or may stay level based on the performance of the index. By tying the increase to the performance of the index, it allows the injury victim to have a higher payment increase if the market returns allow for it. In a given year, the increase in the payment can range from 0% and is capped at a high of 5%. This rider gives the injury victim more upside in years when the index performs well and can potentially match inflation in a more unified way. There is no downside. In years when the index is negative, the payment would just remain constant. Using the ILAPA rider is one way to limit the interest rate risk.
In 2022, Independent Life introduced a new product called iStructure. iStructure Annuity™ is the first uncapped, index-linked structured settlement annuity and is designed to provide the opportunity for growth in payout amounts with the same flexibility and tax benefits of traditional structured settlements. iStructure is linked to the Franklin BofA World Index™, powered by the quantitative insights of Franklin Templeton and Bank of America, with the objective of capturing long-term growth. This is accomplished, in part, by the index systematically allocating to companies around the world with the potential for high profitability. iStructure can be used for a variety of situations including personal injury cases, structured attorney fees, structured installment sales and taxable settlements. The benefits for clients include tax-free and tax-efficient income, the potential for increasing income, customizable payment options, market-downside protection, and protection against inflation.
Estate Tax Liability and Trust Shortfall Medicaid Payback Commutation Options
Commutation of payments is an option provided by most life insurance companies. Commutation provides payment of any remaining guaranteed payments under the annuity policy in a one-time lump sum upon death. Before 2021, the standard commutation option was to pay a single lump sum calculated using a discounted present value of the remaining guaranteed payments. In 2021, Berkshire Hathaway introduced options on commuting payments that do not require commuting all payments or selling them upon death to help create liquidity for probate. Traditionally, commutation was an all or nothing selection done at the time of policy issue. Berkshire’s new options for commutation do not require all remaining guaranteed payments to be commuted, but only enough to satisfy an estate tax liability or a Medicaid payback requirement. This change will have a large impact for structured settlements that pay into a special needs trust or pooled special needs trust. A client can decide at the onset to only commute the amount needed to cover estate taxes or the Medicaid lien. This allows the secondary beneficiary to potentially receive more payments in the future.
Considering the long history of structured settlements in the market, all of the product evolution has come about in a very short time. It is our hope that other companies will continue to introduce innovative options for settlements to implement for the benefit of injury victims we serve. New products and services could create more competition and ultimately provide better options and rates to help families. With more innovative solutions, families can choose what is right for their personal wants and needs when settling their personal injury case.