The structured settlement annuity market is looking up thanks to significant growth over the last two years. Some of this growth can be attributed to the fact that more claims officials appreciate the value of using a structured settlement to settle personal injury cases. And attorneys recognize the financial security a structured settlement can provide to an injured victim and their family.
Structured settlement annuitants also enjoy increasing statutory protection in many states. This growth has attracted two new life insurers to enter the market. And there is talk of another two new life insurance companies entering in the near future.
Mechanics of the transaction
A structured settlement almost always is funded with an annuity issued by highly-rated life insurance companies. Like retail annuities, structured settlement annuities, the life insurers that issue them and the licensed insurance brokers that help to place them are regulated in every state by the insurance department.
Like many retail annuities, structured settlement annuities provide fixed income streams to annuitants and are eligible for state guaranty association protection (with present value coverage limits of $250,000 or more in most States). Unlike purchaser s of retail annuities, however, structured settlement annuitants receive the full amount of their benefits (including amounts attributable to annuity earnings) free of federal income tax.
Current market conditions
For structured settlement annuities, as for retail annuities, many extrinsic factors influence production. The economic recession of 2007-2009 and subsequent historically low interest rates have depressed sales of all annuity products.
Decreases in claim frequency in some areas and property-casualty companies’ reorganizations also have led to reduced sales of structured settlement annuities. Not surprisingly, when you view the results from last 10 years of structured settlement annuity sales and compare them to retail annuity sales for the same time frame, the trends have been very similar, as shown in the following bar charts compiled by Melissa Price, President of Structured Financial Associates, Inc. and LIMRA Secure Retirement Institute (both reprinted with permission).
As the charts show, production from the structured settlement industry has dipped slightly from its lifetime high in 2008 of $6.2 billion. The lowest premium year since that time was $4.82 billion, but it experienced increases in 2010, 2012, 2013 and 2014 — a pattern similar to that in the retail annuity market.
Nine major life insurers now offer structured settlement annuities, in addition to their other annuity products. After the economic downturn of 2007-2009, many property-casualty and life insurers underwent reorganizations and realignments, which caused two of the companies (Allstate and John Hancock) to exit the market place.
However, two others have since joined —Berkshire Hathaway and Mutual of Omaha —and two others are rumored to join in the near future. All trends point to continued growth in the structured settlement marketplace.
Why structured settlements are important
Structured settlements are a unique settlement tool for both property-casualty carriers and plaintiff attorneys. Both claims professionals and plaintiff attorneys work with structured settlement consultants to use the product to create future payment streams to ensure that the settlement proceeds will last as long as the injured plaintiff will need it. Often characterized as “unique investors,” injured parties frequently have unique financial circumstances and life-long medical needs.
A structured settlement allows for planning for those future needs with income free from federal income tax, in accordance with Section 104(a) and other provisions of the tax code. This illustrates the major difference between a retail annuity and a structured settlement funded by an annuity.
The entire structured settlement payment stream is free of federal income tax (as well as most state income tax); whereas, if a plaintiff purchases a retail annuity after having already received settlement proceeds, the annuity earnings are taxable.
The injured plaintiff
Mounting medical expenses and the prospect of future medical expenses, plus loss of employment earnings, can be more than daunting for an injured plaintiff. The need for secure, regular guaranteed income or payments for future medical needs is critical.
Conventional investing options often do not provide the guaranteed certainty or the advantage of tax-free payments that structured settlement annuities provide. Structured settlements are backed by many of the strongest life insurance companies in the U.S. This type of safety and security often makes the most sense for injured plaintiffs, who cannot afford to bet their financial futures on more risky options like stocks and mutual funds.
Structured settlements are well suited for many victims of physical injuries, especially children. If an injured minor receives a cash recovery state law in many cases will mandate that it be invested in a low-yielding savings account — and then turned over without restriction when he or she turns 18 (and may be poorly equipped to manage a substantial investment).
To make matters worse, a minor’s investment earnings generally will be taxable to his or her parents, and in many states they may be required to file guardianship reports. A structured settlement more often than not is a far better alternative, permitting an injured minor and his or her family members to defer payments until they will be needed — and until he or she can be expected to be more capable of handling money. Numbers confirm that more and more injured plaintiffs and their families are choosing to resolve their claims structured settlements.
The professionals involved in the structured settlement industry are passionate about structured settlements and the injured people they serve. They are ethical people who have given freely of their time and money working to help pass important regulatory legislation designed to protect structured settlement claimants.
This not only includes ensuring injury victims continue to have access to structured settlements, which can be challenging in an era of sweeping tax reform, but also includes how the industry’s trade association, the National Structured Settlements Trade Association (NSSTA) has been the primary force in promoting enactment of Structured Settlement Protection Acts in 49 states. Structured Settlement Protection Acts provide protection to structured settlement recipients who agree to sell some or all of their rights to receive future payments.
Structured settlements have widespread support from groups like American Association of People with Disabilities (AAPD); the Congressional Structured Settlements Caucus, co-chaired by Congressman John Lewis, D–Georgia and Congressman James Sensenbrenner, R-Wisconsin. The National Consumers League and the trial bar also endorse structured settlements. Many Members of the U. S. Congress and State legislators throughout the country have long recognized and championed the public policy benefits provided by structured settlements.
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