The current economic crisis can create anxiety among trial attorney clients, especially those who hope for long-term financial compensation for a personal injury. Uncertain times often spur worry that investments used to generate income over a lifetime can be wiped out. Fortunately, for clients with structured settlements, strict insurance industry and regulatory safeguards ensure that their investments are safe. Attorney fees from personal injury cases that are part of a structured settlement are also protected through state and federal regulation.
Settlement Payment Options
Clients have three payment options when their claim or lawsuit is settled: 1) a lump sum cash settlement, 2) periodic payments through a structured settlement annuity 3) a combination of cash and structured payments.
In years past personal injury settlements always involved lump-sum payouts. While the payout was tax free, the money earned from the settlement was taxable unless invested in tax-free municipal bonds.
Clients choosing cash settlements assume the risks associated with their investments during both stable and volatile economic times. Clients requiring lifetime care and support usually do not have the luxury of being able to weather market ups and downs and fluctuating incomes, especially when unforeseen medical emergencies are part of life. Managing the lump sum to last possibly for a lifetime is also a concern. According to a California Rutter Group study, 90 percent of recipients of a lump sum settlement spend all of their funds in five years or less.
To reduce the risks associated with lump sum payouts, the Internal Revenue Service allows defendants to purchase insurance annuities to fund settlements to injured parties with all proceeds from the annuities lax-free.
Using annuities, injured parties receive guaranteed tax-free income benefits issued by an A or A+ rated life-insurance company. Clients can decide to receive 100 percent of the funds through a structured settlement annuity or a combination of an annuity with a cash component for immediate or emergency situations.
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 thc 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, For example, American International Group (AIG), the parent company of American General Life Insurance Company, Is currently facing dire financial conditions. Yet, because of strict regulations, American General is not affected by AIG’s circumstances and remains strong and well capitalized, retaining an “A” or “excellent” rating by A.M. Best Company. While the parent company is experiencing financial trouble, assets in the insurance company subsidiary are segregated and protected.
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 assault clients that these assets will continue to produce regular returns designed to meet immediate and long-term needs,
Attorneys Fees Also Safe
Attorneys who have deferred fees through structured settlements can also rest easy, Attorneys use structured settlements to defer taxable Income to a later date when income could possibly be taxed at lower rates, Structured settlements provide a stable income stream and competitive rates of return. Just as with client-structured settlements, attorney fee settlements offer the same kind of safely and regulatory oversight.
With so much negative news coming from the financial sectors, the safeguarding of annuities is one of the few bright spots. In this case, state and federal regulations and policies have done their job.