Structured settlements utilizing life insurance annuities as their funding mechanism have been around for four decades. Over half a million injury victims receive benefits from structured settlement annuities. Each year, life insurance companies that provide structured settlements receive more than $6 billion to fund new structured settlement arrangements and an estimated $156 billion has been paid in total to fund structured settlements in force since the seventies.
Structured settlements are commonly utilized in the settlement of tort claims because of these seven crucial advantages they offer personal injury victims.
1. Life Insurance Companies Have Strong Oversight
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There are a variety of legal protections offered by structured settlements, including several layers of protection against insolvency. The first layer of protection is that annuity providers are overseen by state insurance commissions. Secondly, state law imposes reserve and surplus requirements on life insurance companies. Thirdly, every state has a state guaranty association which guarantees annuities. The final layer of protection is careful selection of the highest-quality annuity providers to provide structured settlements.
Because of strong financial oversight of life insurance companies by the state departments of insurance, structured settlements are very safe and secure investment vehicles for injury victims.
2. States Have Structured Settlement Protection Acts
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In addition to the foregoing legal protections, there are state structured settlement protection acts. The acts protect structured settlement recipients from unscrupulous companies that purchase structured settlements.
“Factoring” companies, the name commonly used for companies that purchase structured settlements, buy injury victim’s payment streams in return for a lump sum payment to the injury victim. The lump sum payment to the injury victim for their future periodic structured settlement annuity payments is typically at a sharp discount with some discount rates being patently unfair.
3. Structured Settlements are Protected Against Future Legal Claims
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Injury victims only get one opportunity to recover compensation for their injuries. If someone who recovers compensation for their injuries is subsequently involved in an accident where they injure someone else or someone is injured on their property, bank accounts and most investments are exposed to claims. In addition, if an injury victim gets into debt and has creditors making claims, their assets could be exposed to these claims. However, many states have either common law or statutes that protect annuities from legal process. For example, in Florida there is a statute that completely exempts annuities from creditors and judgments.
4. Structured Settlements are Protected Against Divorce
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In addition, structured settlements offer enhanced protection under the law in case of divorce. Structured settlements are not owned by the injury victim. Instead, the injury victim is the payee and the life insurance company’s assignment company owns the annuity. Because of this legal arrangement, structured settlement annuities are not an asset owned by an injury victim. Consequently, it is not an asset that can generally be divided in the case of divorce. The income that it produces can be considered in determining alimony, but the asset itself usually is not divided.
5. Structured Settlements are Protected Against Bankruptcy
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Similarly, a structured settlement annuity is not an asset generally reachable in cases of bankruptcy. When a structured settlement is created as part of a settlement, an assignment is done. The assignment is done to transfer ownership of the annuity from the purchaser (the defendant) to the life insurance company assignment corporation. The assignment corporation takes on the obligation to make the future periodic payments and purchases an annuity from the annuity issuer. That means that structured settlements are very effective shields against creditors.
6. Structured Settlements Offer Many Benefits to Unsophisticated Investors
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Structured settlements are utilized in the settlement of tort claims because of the advantages they offer like income tax-free payments, fixed, low-risk competitive returns, guaranteed lifetime income, no-cost financial management, spendthrift protection, creditor protection, and avoidance of guardianship requirements in certain cases. Structured settlements offer the unsophisticated investor the ability to make a one-time, simple investment decision that will provide competitive returns with no market risk and no taxation.
7. Structured Settlements Offer Added Benefits for Sophisticated Investors
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Similarly, for sophisticated investors they can use the annuity as a funding mechanism for other investments using a dollar cost averaging approach. For the injury victim, a low-risk, fixed and income-tax-free vehicle that can provide guaranteed income is very attractive and appropriate. In addition, a structured settlement can be a tool to pass wealth on to the next generation avoiding income tax on any of the income generated. As such, having a structured settlement as the cornerstone of a financial settlement plan, can mean the difference between outliving the settlement or not.
This article was adapted from the book The Art of Settlement, written by Jason Lazarus. For more advice on structured settlements, you can find The Art of Settlement on Amazon.
