Structured Settlements 101

Structured settlements as we know them today came about in 1982 when the U.S. Congress passed The Periodic Payment Settlement Act of 1982 (Public Law 97-473). The act enables injury victims to obtain customized structured cash payments plans through insurance annuities that assure them guaranteed, tax-free income over time. Previously, most settlements were doled out in lump sum cash payments with any money earned from the settlement subject to taxation. Injured parties, usually unaccustomed to receiving large sums of money, typically burned through their settlement proceeds and were soon left with nothing.

Today, judges actively encourage structured settlements by court order, usually in the pre-trial phase, in not only personal injury cases, but in workers’ comp, employment and discrimination, molestation, Medicare, environmental, property and property loss cases. The types of cases in which structured settlements are allowed have grown substantially over the last five years.

Structured Settlement Fundamentals
During settlement negotiations, plaintiff and defendant attorneys determine the injured party’s ongoing medical care, living and family needs (i.e., possible future medical treatment, in-home nursing expenses, college tuition for dependent children, adjustments to living quarters). Once the injured party’s needs are determined and a dollar amount assigned, the defendant (or its insurance company) agrees to the settlement and funds the obligation by purchasing an annuity from a high-rated insurance company. This insurance carrier or “assignee” then takes over the liability from the defendant and begins making periodic payments to the injured party.

For injured parties, structured settlements provide a tax-free income stream, possibly for life, without fear of money mismanagement, market fluctuations or unscrupulous con artists waiting to milk them out of their money. Typically, future income and upfront cash for attorney fees, medical expenses and related liens are included in the package. In the event of the injured party’s death, a guaranteed portion of the settlement may be made to the estate or a named beneficiary such as a spouse or child.

For defendants, structured settlements allow payment guarantees and obligations to shift from the defendant to the assignee life insurance company issuing the annuity.

Structured Settlement Safeguards
The safety and security of a structured settlement annuity depends, of course, on the financial stability of the life insurance company responsible for paying the benefits. That is why only highly rated life insurance carriers are used.

State and federal solvency standards and regulations protect annuity policyholders in a number of ways. Regulators use conservative accounting and investment rules, which keep insurers from investing heavily in risky investments. Investments are typically high-quality investment grade fixed income securities. Structured settlement annuities enjoy competitive returns compared to other conservative investments in addition to their tax-free status.

In California, companies offering structured settlements must be first approved by the California Department of Insurance. The department evaluates the insurance carrier’s solvency and whether the carrier complies with California regulations. Carriers are also subject to mandatory annual audits and other financial compliance requirements.

By regulation, all annuity reserves must have assets that are equal to or exceed the corresponding payment obligations. In addition, the assets supporting these reserves may not be removed from the life insurance company. Reserve sufficiency is mandatory and is frequently monitored by state legislators and auditors. State insurance commissioners have developed these regulations to preserve the solvency of general accounts in which assets are held so that contractual obligations to policyholders are met. These general accounts support only the obligations of the insurance companies–and not the obligations of a parent company or other subsidiaries.

In other words, parent companies are prevented from raiding capital from their profitable, well-capitalized life insurance company subsidiaries. With structured settlements, personal injury clients have the peace of mind of knowing that the underlying assets enabling them to receive compensation from their injury are sheltered. Attorneys can confidently assure clients that these assets will continue to produce regular returns designed to meet immediate and long-term needs.

Given the investment alternatives in today’s financial markets, structured settlements still offer the safety and stability needed for individuals who require temporary or ongoing financial support.