Structured settlements can help resolve most any case and are regularly used in personal injury lawsuits. They increase the value for a plaintiff of the defendant’s payment, “bridging the gap” between negotiating parties. Afterward, the plaintiff can depend on monthly, annual, and even lifetime payments.
Often, news articles about “structures” tell stories of fraud. And fraud sometimes happens…when “factoring companies” convince a plaintiff to sell their structure for far too little. Those news articles, and the plaintiffs in them, have often lost sight of why the structure was created in the first place.
The arrangement typically secures several advantages. In fact, a 2022 MetLife poll found that 76% of claims professionals would likely use a structured settlement if they were plaintiffs in a physical injury case.
While the last two years have seen far fewer structures, that’s changing in a big way – largely due to courts reopening and increasing rates-of-return.
Some lawsuits are settled with a one-time payment. “Structured settlements” are settled with a schedule of payments. In the 1980s, and occasionally today, the defendant makes those payments. In those cases, the plaintiff’s income stream depends on the defendant’s solvency.
Today, the plaintiff typically avoids that dependency. Rather than making each payment, the defendant makes a single payment to an “Assignment Company.” The Assignment Company buys an income-producing investment and uses it to satisfy the plaintiff’s schedule of payments.
Often, the investment used is an annuity issued by the Assignment Company’s parent life insurance company. Currently, the largest annuity issuers for structured settlements are Pacific Life, Berkshire Hathaway
, and MetLife
Typically, the annuity is either fixed or life-contingent, sometimes with a cost-of-living adjustment. But the last decade has seen a growing number of other investment products. These include life insurance company offerings of indexed annuities, variable annuities, and funding agreements. And other providers offer options similar to mutual funds. Most Assignment Companies are in the U.S., while some are based in Ireland and other tax-efficient jurisdictions.
A Dip and Rise After Three Decades
Defendants have spent an increasing annual amount to fund structured settlements for the last several decades, with few exceptions. For the most part, they spent over $5 billion annually for the last two decades. In 2019, funding reached a height of $6.5 billion, averaging $250,000 per case.
Numbers dropped with the pandemic, along with other types of settlements. As both plaintiff and defense lawyers can attest, cases slowed to a crawl as courts closed and shifted to new protocols. Without the concern of a trial and possible award, defendants paused many settlement negotiations. Interest rates also remained low, preventing insurance companies and investment providers from offering higher returns for cases still moving to settlement.
Today, we see relief on both fronts. Courts have largely opened and high interest rates have become the norm, even a concern. The next twelve months will likely see a significant return to settlements and the use of structures.
An Array of Benefits
The structured settlement offers many advantages, including the three below. Surprising to many, the last of these can’t be discussed with plaintiffs.
A Customized Income Stream
Like everyone else, personal injury plaintiffs don’t expect the same monthly expenses decade after decade. They might purchase a car in four years, a home in nine years, and pay for follow-on surgery in fifteen years. Any good “life care plan” will predict uneven expenses. And yet, unless they use a structured settlement, they can’t fund those uneven expenses with an annuity.
In general, annuity payments are subject to a 10% tax penalty unless they are (1) paid to someone older than 59 ½ or (2) paid annually, or more regularly, in “substantially equal periodic payments.” On the other hand, structured settlements funded by annuities don’t face this restriction.
Thus, structures often call for decades of monthly payments with large lump sums scheduled for the occasional big expense.
Tax Support for a Funded Future
Personal injury plaintiffs often expect less future income than others, and yet, larger medical expenses. This makes financial planning particularly important. Our tax laws incentivize workers to invest in IRAs. Likewise, they incentivize plaintiffs to invest lawsuit recoveries in structured settlements. Both arrangements delay the time that the taxpayer is treated as receiving proceeds.
Why do we incentivize plaintiffs to delay payment? Receiving proceeds over many years, rather than as a lump sum, protects against premature dissipation. As noted by members of Congress and the Joint Committee on Taxation, this can protect the government from additional dependence on the social safety net. The policy seems particularly sensible since the defendant’s payment is supposed to compensate for financial needs resulting from the injuries they caused.
New statistics on dissipation may become available in the next few years, which would also help inform plaintiffs as they decide whether to structure. The American Association of Settlement Consultants is working with several members of Congress to request a study by the Government Accountability Office.
Even without new data, we know structures regularly prevent dissipation. As said by Betty Gregware, Mutual of Omaha’s National Sales Director for Structured Settlements, “Structured settlements can provide unprecedented financial security and peace of mind to injured parties and their families.”
The Guaranty Plaintiffs Don’t Know About
Like many insurance products, a structured settlement annuity is backed by the guaranty fund in the home state of the annuity issuer. Most funds provide $250,000 of protection, though it varies by state.
Thus, plaintiffs with structures can rely on the creditworthiness of the paying life insurance company and also a state guaranty fund. To avoid application of the coverage cap, and diversify risk from carriers, some advisors help plaintiffs use annuities from several carriers in a single structure.
Insurance companies and brokers know well that in most states they’re prohibited from even mentioning “the existence” of a guaranty fund. Minnesota makes an exception, allowing them to “explain verbally” the coverage offered. “Interestingly, the law requires that a customer be informed when guaranty coverage doesn’t apply, but not when it does apply,” says David Schoeggle, insurance attorney at law firm Lane Powell.
Some have argued against the prohibition, including Bruce Saul, former Chief Counsel at Ameriprise Financial
and former Senior Regulatory Analyst at the U.S. Treasury’s Federal Insurance Office. Says Saul, “The strictness of the advertising prohibition goes against the grain of a current trend in financial regulation, which is to empower consumers with information that helps them make good decisions.” On the other hand, Saul notes, “The prohibition is intended to prevent insurance companies with lower financial strength (and their agents) from pushing through sales by pointing to the protection of the guaranty fund.”
Knowing Next Steps
Hundreds of advisors and brokers across the country specialize in the use of structured settlements. Since structures are only used to settle lawsuits, few investment advisors have experience with them. Most investment advisors are also unpracticed in addressing tax and government benefits unique to settlement transactions.
Many settlement specialists are members of the Society of Settlement Planners, the American Association of Settlement Consultants, and the National Structured Settlements Trade Association. MetLife’s 2022 poll found that 90% of claims professionals think settlement consultants play an “important role” in helping the parties understand the use and value of a structured settlement.