by John Darer® CLU ChFC CSSC RSP CLTC
With interest rates that naturally fluctuate, a structured settlement lock-in is an important tool to help stabilize the process of placing structured settlement annuities for structured settlement brokers, settlement consultants, settlement professionals and settlement planners. A structured settlement lock-in may offer a significant benefits to claimants, plaintiffs, defendants and insurers alike at the time of case resolution.
What is a structured settlement lock-in?
A structured settlement lock-in means that the structured settlement annuity issuer will guarantee the cost of a structured settlement providing a specific payment stream in exchange for the "quid pro quo" of a commitment to accept or purchase. The guarantee could be a week or, even a year. It is important to note that it is NOT a rate lock-in, it is the cost for a specific set of benefits. There is an internal rate of return associated with the cost/benefit combination that you are essentially locking in, but you cannot instruct a life insurance company to lock in a rate. You have to submit an illustration to lock-in.
Are the fees for a structured settlement lock-in?
While most structured settlement annuity issuers will lock-in with out charge for 30-60 days, the longer lock ins generally require a rate commitment fee that is typically 0.2% of premium for each 30 days. The reason for applying a fee is that a life insurer has a regulatory obligation to purchase assets to cover its liabilities and they run a risk if the purchase commitment is not honored.
Examples of where a structured settlement lock-in is helpful
- To secure the cost of structured settlement payments that must be expressly stated in a petition for Court approval of a settlement for minors or wrongful death action and in all settlement documents.
- Protect against downward interest rate fluctuations during the time period between the date that the parties have reached agreement to settle and the date the structured settlement is funded.
- Where the Defendant will not fund the structured settlement funding amount prior to receiving all settlement documents, courts orders etc.
- Where an unfavorable rate change has been announced by one of the structured annuity companies and the settlement is not likely to be funded prior to that date.
- Critical on larger cases where there is often an intricate blend of annuities from different companies as part of an integrated structured settlement plan with more than one structured annuity issuer, where two only do home office daily rate quotes and where daily rates may be otherwise involved.
- To increase parties satisfaction with the overall structured settlement process
The potential consequences of no structured settlement lock in:
- If the Court takes months to approve a minor's settlement or wrongful death settlement at which time it is possible that the benefits in the petition cannot be funded at the same price. This would require the submission of a new petition for a revised (possibly lower) benefit stream and needless further delays.
- The intricate balance of different annuity issuers in an integrated structured settlement plan could be disrupted requiring recalculations and possible re-selling.
- You might get lucky and structured settlement rates will move in a positive direction for you between the date that the agreement to compromise is reached and the date that settlement documents are executed (note this difference!). The settlement documents expressly state the specific periodic payment obligation.
- If the structured settlement payment stream is composed of deferred periodic payments the wrong guess, if interest rates move in the wrong direction, could be devastating
A Privilege Not A Right!
It's important to note that a lock-in is a commitment. It is a privilege granted by the annuity issuer. It is not a right. If you are going to gamble then gamble. 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.