Structured Settlements 4Real™ Blog: Structured Settlements | Settlement Planning News and Commentary

SPIA | Immediate Annuity "Annual Cash Flow" IS NOT Rate of Return!

9.46% annual cash flow said the email blast. Clicking on the link, led to a website which featured the following advertisement for a single premium immediate annuity (also known as a "SPIA")
 

The solicitation clearly targeted to seniors seeking lifetime income. Having sold to seniors and taken  mandatory courses about marketing that are required of insurance agents and brokers, I couldn't help but contemplating whether or not such an ad is a fair sales approach. In my opinion the asterisked disclaimer is insufficient.

1. A single premium immediate annuity generates the return of principal and interest on what the senior invests.
2. A single premium income annuity is a way to provide stable secure income and address longevity risk.
3. The annual cash flow is calculated assuming the senior lives to life expectancy. Under the product being sold in the ad, there is no disclaimer that clearly states that the annuity stops on the senior's death. In the above example, the actual rate of return is zero if the senior dies before they have received $100,000 in payments!
4. The "annual cash flow" is a sales gimmick. It is not a rate of return! It has the potential to be misleading when used  with seniors to compare to another investment as it appears to be used in the ad. The actual rate of return, as measured by an the fairer Internal Rate of Return (IRR) is less than what is stated.

 

Secondary Market for Structured Settlement Payments: Labeling is Questioned

Consumers may not understand that they get one set of protections when buying a fixed annuity or receiving an annuity funded structured settlement (which generally is a fixed annuity) a different set of protections when buying a variable annuity (or receiving payments from a variable structured annuity such as MetLife's Settlement Plus) ,  a disputed set of protections  in the battle field of the indexed annuity and even more unclear protections when buying structured settlement payment rights (a/k/a recycled structured annuities and other trade names)

Like Charles Darwin's finches (right), the first three annuity types come from "a common ancestor"; however, there is no uniform set of rules on suitability standards, supervision and training of salespeople, disclosures or advertising even though consumers often buy all three types of annuities for the same reasons. Consequently, the level of disclosure and protection investors receive varies depending on which agency regulates the version of the product they're buying.

A strong argument can be made that the use of the term "recycled annuities" or any term implying that when you buy a stream of structured settlement payment rights from another annuitant who is selling, or being assigned the rights from someone else's prior purchase, you are "buying an annuity" (in the commercial regulated sense that the word "annuity" is often used by purveyors), is a bit of a canard. It cannot be taken literally, only figuratively.   But the way some advertise may give off the false impression that what is being sold is an off the shelf  branded name annuity product from the likes of MetLIfe, New York Life and others.

           

If you were actually buying a regular annuity the transaction would work something like this:

1. A insurance agent licensed to do business in your state who is also an appointed agent the life insurance company issuing the annuity, would take your application
2. You would sign the application.
3. You would give the insurance agent a check made payable to the life insurance company that issues the annuity.
4. A short time later (say 30 days) you would receive an annuity contract with  your name on it. You would have a certain number of days to look over the contract, mull over your purchase and give it back to the company for a full refund of the money you invested ("free look period")

Notwithstanding the above four points, if the buyer of an annuity is a senior, or if a variable annuity sale is taking place there are strict rules for the manner  of solicitation and determination of suitability. Insurers, which are for the most part huge financial institutions, have a supervisory responsibility over their agents in this regard. With  variable annuity sale, there are both insurance regulations and securities regulation that must be addressed with EVERY sale..

How does the typical purchase of structured settlement payment rights by an investor differ from an annuity purchase? If you buy structured settlement payment rights the transaction would typically work something like this:

1. You know a broker or intermediary, who finds cash flows for you, or you observe a cash flow that you like from a chart circulated by a broker of structured settlement payment rights or through an on-line auction.
2. You fill out a reservation form and return it with 10% of the estimated cost of purchase.
3. You sign a purchase agreement
4. From 30-90 days pass, during which time it must be determined, among other things, that the payments have not been previously sold, that there are no child support payments, tax liens, or other liens against the payments., the deal must be reviewed by a judge as being in the selling annuitant's best interest or that of their dependents,
5. The buyer must wire the remaining cash to pay for the purchase
6. The buyer must make sure, among other things that the annuity issuer of the transferred payment rights records the buyer's name in its records.
7. A closing book that is 2-3 times as thick as an annuity contract is given to the buyer. There is just no way to sugarcoat this. For some it will be as confusing as sh*t. One vendor has interposed a trust to purchase and hold the payment rights for the trust beneficiary. Whether through a trust or bought individually, the buyer does not get the underlying annuity contract. 
   

THE BIGGEST POTENTIAL PROBLEM FOR BUYERS OF STRUCTURED SETTLEMENT PAYMENT RIGHTS. Uncertainty about statutory protection. While the fat lady has not yet started to sing, one should watch very carefully to see how structured settlement purchasers of Executive Life of New York structured settlement payment rights are eventually treated. Do the "buyer structured settlement payment recipients" enjoy the same statutory protectons that the regular structured settlement recipients" (i.e.former plaintiffs) do?  While this may not be a concern to risk tolerant investors, this raises valid questions about the suitability as investment for certain types of tort victims.  I am also not aware of Professional  Errors and Omissions coverage that covers insolvencies.

The market for structured settlement payment rights is under-regulated. There are no mandatory disclosures governing solicitation, no rules concerning solicitation of seniors, cripples, paraplegics,  widows,  soldiers, veterans, widowers, quadriplegics, day laborers, the mentally insane, or the average Joe

There is clearly a difference between buying an "annuity" and buying a "structured settlement payment right" as an investor. Those who currently advertise these structured settlement payment rights as "annuities" should consider making it more clear in their advertising what it is they are really selling, 

I've heard some rumbling that some life insurers issuing structured settlement annuties who see their brands being indicriminately associated with unregulated derivative products are considering action that might result in some loss of appointments.

 

A,M. Best Insurance Facts and Stats 2011: How Secure is Insurance Company?

A.M.Best's Insurance Facts and Stats: an introduction to the insurance industry, contains loads of useful information for individual and business consumers of insurance, including structured settlement annuities.

A common question asked by consumers of structured settlement annuities is "how secure is my insurance company?" The supplement to the November 2011 edition of Best's Review contains an excellent section on "Fiscal Fitness" which helps answer the question and underscores the fact that the U.S. bankruptcy code excludes insurance companies. The supplement discusses how insurance companies are monitored and regulated by state insurance departments.

It is also important to observe that despite the current financial crisis, the number of financially Impaired life and health insurance companies is WELL BELOW the historical average of 25  (the peak was 80 during the 1987-1993 time frame). In 2009 the number was between 10 and 20, yet the number reduced to less than 10 in 2010, although A.M. Best says that there is a time lag in reporting due to the reluctance of state regulators to publicly disclose impairments until they have exhausted all avenues to rehabilitate the insurers or facilitate a sale or merger Source: A.M. Best Special Reports

Top cause of impairment: Inadequate pricing/ loss reserves (as opposed to a catastrophic event).  Covers period 1976-2010.

On a positive note, A.M. Best gives a nod to the life insurance industry's strong capital and surplus (emphasis ours). Structured settlement annuities are issued by life insurance companies.

The following insurance groups include current and former structured settlement annuity issuers and are part of A.M. Best's list of the World's Largest Insurers (based on 2009 assets)

3. American International Group, Inc.

6. Aviva plc

7. Met Life Inc.

8. Prudential Financial, Inc.

13.Aegon NV

14. Manulife Financial Corp.

15. ING

20. Hartford Financial Services Group, Inc.

22. Berkshire Hathaway, Inc.

 

 

Plaintiff Structured Settlements: Hartford Life Has No Qualified Assignment Fee

 A qualified assignment fee is an administrative charge by a qualified assignment company for taking on the obligation to make periodic payments from a Defendant or Defendant's insurer as part of the process of setting up a structured settlement. Qualified Assignment Fees generally range from $250 to $750. Hartford LIfe Insurance Company has announced that its assignment company Hartford CEBSCO will be charging no assignment fee for structured settlements payable to plaintiffs. A $250 qualified assignment fee applies to structured attorney fees, which is still very competitive.

The Hartford Life structured settlement program has a qualified assignment company whose assumed periodic payment obligations are backed by two guarantors, Hartford Life Insurance Company (the annuity issuer) and Hartford Life, Inc. The link below leads to a helpful chart that demonstrates the Hartford life qualified assignment program.

Download Hartford Structured Settlement Qualified Assignment Guarantee Overview

The size of a qualified assignment fee, or whether or not a company charges a qualified assignment fee, may or may not matter. A market survey by a structured settlement broker or settlement will help determine if it does. In some cases it means a little extra can go to the injury victim. Some structured annuity issuers have minimum premiums or charge a small case policy fee for premiums less than a certain level. In Hartford's case the small case fee applies for premiums less than $25,000.

Our contact implied that The Hartford is "sharpening its antlers" in preparation to to cut some good structured settlement quotes for annuitants. They will be offering rated ages.

For more information about qualified assignments and the process of setting up structured settlements you may find the educational video to be helpful.

Is A Structured Settlement Annuity FDIC Insured?

No, a  structured settlement annuity  is not insured by the FDIC. The FDIC or Federal Deposit Insurance Corporation covers deposits in banks, not insurance products such as annuities. The FDIC is an agency of the US government that works to protect banks and their depositors. It pays back the depositor up to a specified amount  (limit is currently $250,000) if the insured bank goes belly up and can't give back the depositor's money.

Note that some insurance companies own banks and may issue bank ing products that ARE insured by the FDIC. Furthermore some banks own insurance agencies that sell insurance products such as annuities and life insurance that are not FDIC insured (check the small print!)

The entity that "insures" or guarantees the payment of a structured annuity (or any kind of annuity for that matter) is often the life insurance company that issues the annuity. In some cases there is a guarantee from an upstream holding company.

List of Structured Settlement Annuity Companies, including qualified assignment companies and guarantors, if applicable.

A complex legal reserve system protects policy owners and annuitants and insolvencies are rare. Regulatory prohibition do not permit me, or any other licensed insurance agent or broker to discuss the nature of protections in what might be construed as sales material.

That being said, pay attention in the next few weeks to what happens with Executive Life Insurance Company of New York.  Insurers generally invest in conservative investment options. ELNY was an instance (unlikely to happen again) where this was not the case. in less than a month we'll discover the consequences.

 

Insurance Facts and Stats For Structured Settlement Annuitants or Those Thinking Structured Settlements

The November 2010 issue of Best's Review includes the supplement "2010 Insurance Facts and Stats: An Introduction to the Insurance Industry". It is full of plenty of relevant and useful information for plaintiffs, settlement consultants, defense and plaintiff lawyers, claims adjusters, judges and financial advisers. The information provided underscores that in general, the insurers who issue structured settlement annuities are among the largest, well capitalized  financial institutions in world. Readers can learn (1) about managing risk and insurance (2)how insurers make money (3) about the fiscal fitness of insurers (4) life insurance and annuity industry challenges, and more.

Here are a few stats:

A. World's Largest Insurers  Companies who offer (or formerly offered) structured settlements directly or though subsidiaries

3. American International Group

5. Aviva plc  (former)

6. MetLife Inc.

8. Prudential Financial, Inc.

10. AEGON N.V.  (former)

16. Manulife Fiancnial Corp

18. Hartford Financial Services Group  (former)

B. Leading US Property & Casualtty Insurers in Terms of Policyholder's Surplus

6. USAA Insurance Company  (owns structured annuities funded with USAA Life Insurance Company

C. Top Life/Health Insurers By Admitted Assets

1. Metropolitan Life and affilated companies

2. Prudential of America Group

3. AIG Life Group

4. Hartford Life Group  (former issuer)

5. Manulife Financial  (parent of John Hancock Life Insurance Company (U.S.A/) and John Hancock Life Insurance Comapny of New York 

7. New York Life Group

8.AEGON USA Group (parent of several former annuity issuers Trasamerica Life, Transamerica Occidental, Monumental et al.)

9.ING USA LIfe Group (parent of former structured annuity issuer Security Life of Denver)

D. Top Life Insurers by Capital & Surplus Position

2. Metropolitan Life & Affiliated Companies  (e.g.MetLife Insurance of CT, a reinsurer n the structured settlement space)

3. AIG Life Group

4. New York Life Group

6. Prudential of America Group

7. MassMutual Financial Group  (former issuer through Massachusetts Mutual Life Insurahnce Company)

8. AEGON USA Group

9. ING USA Group

E. Top Writers of Indivdual Annuities in US

1. Metropolitan Life and Affilated Companies

2. AIG Life Group

4. New York Life Group

8. Prudential of America Group

9. Pacific Life Group

 

 

 

 

 

 

Annuitize Part of Annuity, Continue to Defer Part of Annuity HR 5297 Passed by Senate

If you hold an annuity outside  of a retirement plan it may get easier to annuitize only a portion of your annuity contract while allowing the remaining amount to grow tax-deferred

The small-business lending bill HR 5297 which just passed in the United States Senate.,included a provision enabling just this very thing.

The Retirement Income Journal reports that HR 5297, which passed the Senate by a vote of 61-38, resembles an earlier version passed by the House of Representatives, and reflects an idea that has been around for a while. "This is something that has been proposed before," said Whit Cornman, an ACLI spokesman, citing work by Sens. John Kerry, D-MA, Max Baucus, D-MT, and Rep. Earl Pomeroy, D-ND.   

Please note that differences between the House and Senate versions of the bill still need to  be resolved and there is little time to complete this before the upcoming November elections. According to Congress’ Joint Committee on Taxation, the annuities provision would generate revenue of $956 million over ten years, from 2011 to 2020.

The ability to do a partial annuitization represents a  welcome income planning option 

Have questions about income planning? Want to see an  income annuity quote, please contact John Darer at 888-325-8640 or via email to jdarer@4structures.com.

What Does Certain and Life Annuity Mean? Annuity 101

With baby boomers and retirees seeking stable guaranteed income these days it's more likely than not that they will at some point consider annuities. Some annuity terms and phrases like "certain and life"can be confusing and I want to help ease your pain here.

This post is the beginning of a multi-part  Annuity 101 series that will be helpful to anyone considering annuities, whether you are a retiree or getting close to retirement; or you are a personal injury plaintiff or a claimant in a wrongful death action looking at a structured settlement annuity; or a seller of high value low basis property or seller of a business considering a structured installment sale; a plaintiff attorney who is contemplating structuring his fees; or a celebrity who is looking to structure endorsement fees.

So what is "certain and life"?  You may encounter annuity proposals which state "X$ per month certain and life" or "X$ per year for life with 30 years certain" or simply "X$ per month for 10 years certain". Simply put the certain period represents the number of years that will be paid whether or not the measuring life survives the entire payment schedule.

A certain period is sometimes mislabeled a guarantee period. While the terms would be synonymous if the annuity were to pay for a fixed period certain, the misnomer comes when the annuity includes a lifetime benefit. The reason it's a misnomer is fundamental to what an annuity is. An annuity is an insurance contract guaranteed by the full faith and credit of the insurance company that issues it. With a lifetime benefit the benefits  ARE CONTRACTUALLY GUARANTEED. Even an annuity that has no certain benefit such as a lifetime only annuity is contractually guaranteed. This misnomer can lead to documentation errors. It is better to use the term "period certain" to describe payments that will be made "come rain or shine" whether living or not.

With all due respect to Ben Franklin the continued parroting of an 18th Century saying " nothing can be said to be certain except death and taxes" is inaccurate today because for people who qualify for some structured settlements the only thing certain is death and their annuity payments.

Look for more episodes of our Annuity 101 information series in the coming weeks.

in the meantime, click the following link for more information and explanation of the types of annuity payments in a structured settlement.

Penalty Free IRA Withdrawals for Unequal Periodic Payments to Disabled Says IRS Private Letter Ruling

A new IRS Private Letter Ruling gave a disabled taxpayer relief by permitting withdrawals of unequal periodic payments from the taxpayer's IRA

Background

The taxpayer has multiple sclerosis and is unable to engage in any substantial gainful activity because of the physical impairment resulting from this sickness.

1. IRC Section 72 imposes a 10% penalty tax on certain early distributions from qualified retirement plans such as IRA, 401(k) etc. The penalty is imposed on distributions prior to age 59 1/2.
2. IRC 72(t)(2) (iii) provides an exception to the the tax when distributions are attributable to disabled individuals within the meaning of IRC 72 (m)(7)
3. IRC 72(t)(2)(iv) provides an exception when distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his or her designated beneficiary.
4. IRC 72(m)(7) provides that an individual shall be considered to be disabled if he or she is unable to engage in any substantial gainful activity by reason of any physical or mental impairment which can be expected to result in death or to be continued and indefinite duration.

Settlement Planning Issues for Discussion

The either "72(m)(7) disabled" OR "substantially equal periodic payments" exception afforded to disabled IRA owners and qualified plan distributees  appears to apply to holders of modified endowment life insurance contracts  (see IRC 72(v)(2)(B)) and 72(v)(2)(C), but DOES NOT appear to apply to holders of annuities.

IRC 72(u) imposes a similar 10% penalty tax on withdrawals from annuities prior to age 59 1/2. The exceptions relevant to plaintiffs are:

• If annuity contract acquired by estate of decedent by reason of death of decedent   72(u)(3)(A)
• If annuity is held under a plan described in section 401(a) or 403(a), under a program described in section 403(b), or under an individual retirement plan, 72(u)(3)(B)
• A qualified funding asset, defined in IRC 130(d) , but without regard to whether or not there is a qualified assignment  72(u)(3)(C)
• Is an immediate annuity  72(u)(3)(E)- which requires 
• • a single premium;
  • a start date of no later than one year from the date of purchase of the annuity; and
  • the "substantially equal periodic payment requirement".

Please consider these issues when making settlement planning recommendations to disabled tort victims that include non structured deferred annuities.

For more information contact John Darer at 888-325-8640

Financial Literacy Lessons of 2010-4 -Lifetime Annuity for Structured Settlement

A Milwaukee Wisconsin structured settlement consultant bullet points that "only annuities can pay out for a lifetime" in an online sales presentation about structured settlements.

Is this true or just "cheesehead whiz"?

Structured Settlement Watchdog on undercover assignment

Here we go...

What is a lifetime?

The duration of existence of a living being or thing  Source: Merriam Webster OnLine

What is a structured annuity?

A contract or agreement providing for periodic payments. Types of structured settlement payments.

Since one does not know precisely when the end will come, it is very possible that a managed portfolio of investments will "payout" for a lifetime. For example if you are 56 years old  and were to take a lump sum of $1,000,000 and you buy a 30 year United States Treasury Bond yielding 4.625%, you will receive approximately $46,000 for a period which exceeds your normal life expectancy.  A United States Treasury Bond is backed by the full faith and credit of the United States government and is an alternative permissible qualified funding asset for structured settlements.

A structured settlement annuity may provide a contractual guarantee "to pay out for a lifetime", however long that is. Depending on the age of the annuitant actual lifetime may exceed the maximum term of available bonds. With medical improvements and healthier living people are living longer.