November 15, 2019 • By Dennis Beaver
“Three of my employees were involved in a very serious auto accident which will result in a large settlement to provide for future care, loss of income and general compensation.
“They are out of a job and will have trouble finding employment going forward. Financially, they are not sophisticated and look to me for advice.
“What should they do with the money?
That question has become a real family fight. Their adult children want them to put the proceeds into an investment account with a large brokerage firm, and others want the funds deposited into bank CD’s and checking accounts. We are talking well in excess of a million dollars.
“Their lawyers insist the money is put into insurance annuities–Structured Settlements–but today’s interest rates are so low. What is your recommendation? Thanks, Theo from Chicago.”
Structured Settlement = Safety and Security
I ran Theo’s question by Washington D.C. based Peter Arnold who has been in the structured settlement field for over 20 years and is a former Deputy Director of NSSTA, the National Structured Settlement Trade Association.
“In 1982 the United States Congress passed legislation that to this day is helping accident victims live financially secure lives, benefitting from the many advantages of a Structured Settlement,” Arnold explains, adding, “and perhaps the main one is that funds are paid completely tax free, both federally and at the state level.
“Instead of handing an accident victim hundreds of thousands of dollars and told to manage the funds, with a structured settlement a secure stream of payments over a lifetime can be obtained through the purchase of an annuity issued by a highly rated life insurance company. They are ideal for:
–Persons with temporary or permanent disabilities;
–Guardianships for minors or persons found to be unable to manage their money;
–Wrongful death where the surviving spouse and/or children need monthly income;
–Severe injuries, especially with long-term needs for medical care, living expenses and replacement income to support the family.
Mechanics of How a Structure Works
If I woke up tomorrow morning, turned on the radio and heard that they were now required in all major personal injury cases, that would make me–and I believe most attorneys–very happy campers for one reason alone: Flexibility and Safety.
“With a structured settlement, present and future needs of the injured person can be addressed. This can include money to pay for medical care now and, with a child, funds to pay for college or help with housing expenses years down the road. Payments can be scheduled almost any way imaginable.”
Ask Yourself – What’s More Important – Safety or a Higher Interest Rate?
“I get it,” you’re thinking. “The case settles and funds go into an insurance annuity which are paid out over the years. But interest rates today are next to nothing, and I assume that applies to insurance contracts as well. So, when you consider inflation, in reality the funds held in that insurance contract may lose purchasing power over the long-run. Am I correct?”
–That’s right, and, from my perspective–and that of the many lawyers I’ve discussed these issues with–the lowered amount of interest earned is completely irrelevant to the safety and other benefits a structure offers. Arnold observes:
“As structured payments are guaranteed, the ups and downs of the stock market do not affect annuity payments. Those regular, steady annuity payments will remain constant.
“Before structures, stories of accident victims–just like lottery winners–spending the money in a couple of years were common. And let’s not forget family and friends who held their hands out for loans which were never repaid.
“But with a structured settlement, the funds themselves are not reachable by the accident victim; instead, they are paid according to the terms of the contract. This keeps greedy hands away from the money.
“So it is important to understand that the main selling point of a structured settlement isn’t the financial return, rather, it is the security offered the accident victim and tax-free status. However, some insurance companies offer an inflation-adjusted cost of living adjustment.
And if the Economy–And the insurance company–goes into a tailspin?
“Any company can go bankrupt,” you might be thinking, “so what happens if the life company that issues the annuity goes bust? What about the people who have structured settlements with them? Would they lose everything?”
“It’s a great question,” Arnold notes, “But each state has an insurance guarantee association that steps in to cover all or part of payments due. This information can’t generally be used in the sale of an insurance policy, but it is a strong level of protection.”
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.