How Does Structured Settlement Broker Get Paid? Who Pays It?

by John Darer® CLU ChFC MSSC CeFT® RSP CLTC

Let's Talk Structured Settlement Commissions

Virtually every structured settlement broker or structured settlement planner boldly states that either:

• They work for free
• There is no charge for their services
• There is no cost for retaining their structured settlement brokers
• There is no cost for retaining their settlement planners

How can structured settlement brokers or settlement planners work for free and afford to make contributions to buy influence with trial lawyers?

It's common knowledge to lawyers (but perhaps not to injured persons) that many of these structured settlement brokers, settlement planners and/or their firms are contributing big money to state and national trial lawyer associations to buy influence or access, sponsoring RIMS or other legal or insurance conferences, taking out big expensive full page ads in Business Insurance, paying money to the campaign of your lawyer's favorite political candidate, taking your lawyers and colleagues to ball games in catered corporate suites, flying lawyers around in private aircraft,  some boasting of virtually unlimited financial resources.  It's their marketing prerogative of course.

But the truth is that structured settlement brokers or settlement planners DO NOT REALLY WORK FOR FREE. For appointed agents of an annuity issuer (a  population that includes settlement planners), compensation is paid by commission  (or share of commission where there is more than one agent/broker planner)  from the placement of a structured settlement annuity as a "qualified funding asset". Some settlement planning/structured settlement firms disclose this upfront in their web advertising, others do not. This contingent compensation is not unlike the services of a real estate broker that you might engage, the lawyer that you retained to prosecute your lawsuit, or an agent that sells you a life insurance policy. A structured settlement annuity is an insurance product sold by licensed and appointed agents and/or brokers.

How Much Do Structured Settlement Brokers or Settlement Planners Get Paid?

Commissions Vary By the Type of Product Placed

A. Structured Settlement Annuity Funded Structured Settlements

The pricing of a structured settlement annuity, including the indexed linked annuity payment adjustment rider offered by Pacific Life, includes a uniform commission structure, which is 4 percent of the premium placed with the annuity company. As I understand it the uniform commission was intended to eliminate selection bias that might exist if one company paid more compensation than another. The qualified assignment fee (ranging from $0 to $750) is commissionable with some companies. In other cases it is not. Insurance laws in effect in most states expressly prohibit reduction of commissions or rebating.

No Assignment Fee/Not applicable:   American General Life Insurance Company  (AIG), Berkshire Hathaway Life of Nebraska, First Berkshire Hathaway Insurance Company and National Indemnity Company (reinsurance structured settlement), United States Life Insurance Company in the City of New York (AIG), USAA Life Insurance Company

Commissionable Assignment fee:  Pacific Life Insurance Company, Pacific Life and Annuity Company and United of Omaha (Mutual of Omaha). have commissionable assignment fees

Non-Commissionable Assignment Fees:  New York Life, Independent Life, Prudential Insurance Company of America, Metropolitan Life Insurance Company, Metropolitan Tower Life Insurance Company

B. Market Based Structured Settlements

There are different market based structured settlement options for both plaintiffs and attorney. Depending on the solution there could be recurring fees of1%, 1.14%, 1.5%, 1.75% or more charged annually, or debited  (proportionately if not annually) from account balances on a quarterly basis.  So a $1,000,000 into a market based structured settlement could cost $10,000, $15,000, $17,500 annually. Using a simple example, a 1.5% fee on $1,000,000 could result in $150,000 in fees over 10 years, even without any growth  (15,000 times 10). Some providers offer volume discounts. One attorney fee solution provider charges 1% annually and then has breakpoints to lower charges at $5M and other levels.

C. Duration Based Compensation Model (Indpendent Life Insurance Company)

In 2021, Independent Life Insurance Company, a Texas based life insurnace company that only issues structured settlement annuities, introduced a 2%-4%-6% duration based compensation model. The lower percentage is for duartions under 10 years, the second from 10-20 year durations and the 6% is for 20 year plus.

The Indpendent Life move to a Duration Based Structured Settlement Compensation Model was seen partly in reponse to low short term interest rates during and coming out of the Covid-19 pandemic to create business opportunities. The 6% was a risk reward carrot on a stick in an attempt to attract longer term money to the company. For more information, please visit Duration Based Structured Settlement Compensation Model (4structures.com)

D. Funding Agreement Structured Settlements

Introduced by American General and US LIfe as a way to do deferred start dates on non qualified assignments. Funding agreements are not annuities and thus not subject to IRC 72(u). Furthermore compensation can be variable provided the Defendant or insurer meets certain asset requriements and satisfactorily completes a  due diligence questionnaire.  For more information, please visit Funding Agreement Structured Settlement for Taxable Damages (4structures.com)

 

Last updated January 6, 2024

Comments

[John Darer]

Deferred Acquisition Costs (DAC) is a term commonly used in the insurance business. It describes the practice of deferring the cost of acquiring a new customer over the duration of the insurance contract. Insurance companies face large upfront costs incurred in issuing new business, such as commissions to sales agents, underwriting, bonus interest and other acquisition expenses.Insurance companies incur large expenses when acquiring new business, but to ensure th (such a commissions) at they comply with U.S. GAAP's matching principle they need to spread out these costs over the period in which revenues are earned.

With the 9/11 VCF cases a one time exception was made to the New York General Obligations Law that permitted agents to voluntarily reduce their commissions. In those cases where agents chose to do so the reduction in commission did not translate into a dollar for dollar year 1 credit due to the accounting spreadout

[Christi Fried]

I have worked at 4 life companies that have provided structured settlement annuities and I disagree with the comment that the annuity company will pay commission out of its own funds. The price of each annuity is calculated using a multitude of variables including but, not limited to, current yield rates, profit margin, mortality rates (if life contingent), fixed percentage for the parent company and commission. Therefore, they are not advancing 4% commission to the broker. They certainly do not hope that the company's investment margins are sufficient to recover the commission advances.

For example, if the cost of a structured settlement annuity is $1M then the commission paid to the broker is $40,000. The remaining $960,000 is used to pay the fixed percentage for the parent company and then the remainder is invested to provide the benefit payments. If the commission is reduced to 2% then the broker would be paid $20,000 and the remaining $980,000 would be used to pay the fixed percentage for the parent company and then the remainder would be invested which would increase the benefit payment to the annuitant.