by John Darer CLU ChFC CSSC RSP CLTC
A structured settlement rate lock-in is an important interest rate shift protection tool available to those who place structured settlements, claimants, plaintiffs, defendants and insurers alike at the time of case resolution.
Locking in a structured settlement means that the structured settlement annuity issuer will guarantee the cost of a specific benefit stream in exchange for a commitment to accept or purchase the structured settlement payment stream. The lock in guarantee could be a week or, even a year.
What are the fees for a structured settlement lock-in?
While most structured settlement annuity issuers will lock-in with out charge for 30-90 days, the longer lock ins generally require a rate commitment fee that is typically 0.2% of premium for each 30 days.
Watch my January 2011 video podcast on The Structured Settlement Lock in
Why would a party to litigation be interested in a structured settlement lock in?
- Secure the cost of a structured settlement payment stream that must be enumerated in a petition for Court approval of a settlement for minors or wrongful death action.
- Protect against downward interest rate fluctuations during the time period between the date that the parties have reached agreement to compromise and the date the structured settlement is funded.
- If a defendant or insurer is also willing to fund the structured settlement in advance of court approval, even better. In one case that I worked on that was subject to delays in one of the New York City Surrogate Courts the financial difference from pre-funding was over $161,000!
- Protect the settlement plan when more than one structured annuity issuer is used in a diversification
- Ultimately increase parties satisfaction with the overall process
The potential consequences of no structured settlement lock in:
- Court could take months to approve a minor's settlement or wrongful death settlement at which time it is possible that the benefits in the minor's petition cannot be funded at the same price. This would require the submission of a new petition for a revised benefit stream (which could be worse!) and result in needless further delays.
- The intricate weave of a diversified structured settlement portfolio with more than one annuity issuer could be affected.
- In cases involving minors, incompetents, wrongful death, or where court approval is otherwise needed, the settlement documents must set out the specific stream of periodic payments.
- If the structured settlement payment stream is composed of deferred periodic payments the wrong guess about which way interest rates will go could be devastating.
Onec again, a lock-in is a commitment. It is a privilege granted by the annuity issuer to its appointed agents. It is not a right. Speculators can gamble. But when you are dealing with the needs of a catastrophically injured person with defined needs, is gambling prudent? If you want assurance then lock in. But you must understand that when a lock-in is submitted the carrier has to purchase assets to secure the benefit stream. If the case is not funded the annuity issuer may have to sell the bonds. Holding higher yielding bonds in a downward interest rate environment may not be a problem, but the reverse is true in a generally upward rate environment.