by John Darer CLU ChFC MSSC CeFT RSP CLTC
With structured settlement factoring discount rates having dropped considerably, structured settlement annuity issuers should consider reviewing the fixed and determinable formula they use for a death commutation rider to be sure its competitive. A death commutation is an estate planning option available with a structured settlement.A death commutation rider provides for an automatic liquidation of all or a portion of the remaining certain structured settlement payments and guaranteed lump sum payments.
The structured settlement commutation rider was introduced in 1995 by Allstate Life Insurance Company when the Federal Estate Tax Exemption of $600,000 was lower than the present value of many modest settlements. Before the rider was introduced the parents of brain damaged baby with a structure funded with $3,000,000, had a $2,400,000 exposure to Federal Estate taxes and a potential major liquidity crisis staring down at them if the child died. Now however the Federal Estate tax exemption exceeds $11,200,000 per person, (with many states opting to mirror on the Federal exemption) makes the issue moot for a great percentage of settlements.
A structured settlement commutation is based on a fixed and determinable formula that generally uses one of the following methods depending in the insurance company:
- The cost of an annuity that would provide the remaining certain payments or guaranteed deferred lump sum payments based on the rates in effect on the date of the structured settlement payee's death.
- A fixed percentage of the present value of the payments to be commuted, with present value calculated using a discount rate from or based on a published bond index. The percentage used varies by companies that use this formula on their commutation but it could vary by company from 90%-95% of the present value.
One of the limitations of a structured settlement commutation rider is that it must be fixed at the time of settlement, to follow the method that Allstate used to earn a favorable IRS Private Letter Ruling in 1995. Commutations are part of insurance contracts which are regulated in all states where the insurer does structured settlement business.