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It's a Jumble Out There | Fixed Income Annuity, Fixed Indexed Annuity or Index Linked Annuity?

by Structured Settlement Watchdog

It's a Jumble Out There

I was surprised to find this fixed income annuity Jumbleaya on the website of a group of esteemed industry colleagues:

Have a seat folks!

• "A fixed income annuity is an annuity with some guarantee against loss while also allowing for market rates of return inside the annuity.
• The upside in these annuities is usually capped at some amount, but the annuities offer downside protection (i.e., if the markets go down, the annuity payments remain the same).
• So, a fixed annuity often offers the potential of better rates of return than the structured settlement annuity fixed rates are offering".

Note: I've bullet pointed to isolate the 3 statements for ease of appreciating the contradiction.

What does Fixed mean?

Fixed Definition & Meaning - Merriam-Webster    "not subject to change or fluctuation (e.g. a fixed income) "

What is an Income Annuity?

Income annuities are an insurance product issued by life insurance companies that convert a premium to income starting immediately ( Immediate Annuity or " SPIA" ), or in the future  (Deferred Income Annuity or "DIA")

What Is a Fixed Annuity? Uses in Investing, Pros, and Cons (investopedia.com)

What Are Index Linked Structured Settlement Annuities?

An indexed linked structured settlement annuity is a tax-advantaged type of structured settlement option that provides protection for when the market goes down, combined with an opportunity for growth that varies with the market index the annuity is tied to. It gives you more income growth potential than a fixed income structured settlement annuity. or a fixed income structured settlement income annuity with a fixed percentage COLA, along with less risk and less potential return than a variable annuity.

Three life insurance companies that issue structured settlement annuities have index linked structured settlement annuity options:

1. Pacific Life Insurance Company and Pacific Life & Annuity Company introduced their Index Linked Annuity Payment Adjustment Rider (ILAPA), in 2014  ILAPA (pacificlife.com)
2. Independent Life Insurance Company introduced iStructure in 2021 iStructure Annuity | Industry's 1st Uncapped Index-Linked Structured Settlement Annuity ; and 
3. The Prudential Insurance Company of America introduced Income Advantage Prudential Income Advantage | Structured Settlement Index Linked (4structures.com)   Guaranteed Income Secure Growth Potential (scene7.com). Prudential refers to its product as "index linked" in consumer facing communication.

Currently, no life insurance companies offer variable structured settlement annuities. 

 

 

What is a Mutual Insurance Company?

by Structured Settlement Watchdog®

What is a mutual insurance company?

A mutual insurance company is owned by its policyowners/policyholders.  Many, but not all mutual, insurance companies include the word "mutual" in the company name.

More evidence that certain "cash in your annuity" companies haven't a clue. Cashinyourannuty(dot)com says:

"A company that is not publicly traded is known as a mutual insurance company".

This is the kind of stuff you learn when you first get licensed for insurance and/or securities. But wait...there is no license for Cash in Your Annuity, or cashinyourannuity(dot)com.

A company whose shares are not publicly traded is a privately held company.

 

Annuity Payout Rate | Is Annuity Payout Rate an Interest Rate?

by John Darer® CLU ChFC MSSC RSP CLTC

An annuity payout rate is not an interest rate. An annuity payout rate is the percentage of the annuity purchase price that is paid out each year and includes both interest and return of principal. 

The term "annuity payout rate" is used in marketing as a way to make income annuities more attractive. 

If seeking to purchase an income annuity or a salesperson is trying to get you switch from a CD or other income producing investment, caution should be taken when considering the alternatives.

Internal Rate of Return (IRR) is probably a better measure of comparison than annuity payout rate.

The annuity poyout rate is not the interest rate no matter which way you stack it

 Last updated Decmber 17, 2023

 

Income Annuity is "MeteoRIGHT" | LIMRA Secure Retirement Institute

by John Darer® CLU ChFC MSSC RSP CLTC

According to figures from LIMRA Secure Retirement Institute (LIMRA SRI), fixed income annuities are one of the two rising stars. 

Structured settlement annuities are a form of fixed income annuity that may contain elements of immediate annuities and deferred income annuities.

Insurance Newsnet's Linda Coco goes so far as to categorize the rising income annuity trend as " "The income annuity meteor"

The Income Annuity Meteor Shower | It's Raining Income!

Joseph Montminy, assistant vice president at LIMRA SRI told Insurance Newsnet that there is a trend of rising sales of income annuities (fixed immediate and deferred income, combined), In 2014, those sales totaled 12.4 billion, up from $10.5 billion in 2013 and LIMRA projects these annual sales will rise to (a combined total of) more than $20 billion by 2018.”

With income annuities, like structured settlements, consumers have to be willing to exchange the control over a portion of their assets, or settlement, in order to get a higher guaranteed payout, what I like to call "a job that they cannot be fired from". Check out this video.

 

 

How Safe Are Structured Settlement Annuities?

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Annuities are contracts that are issued by life insurance companies.  A structured settlement annuity is a type of annuity contract. A number of the life insurance companies that issue structured settlement annuity contracts have been in business for over 100 years, with several in operation since the 1800s! 

4structures.com LLC  has compiled a "structured settlement annuity company museum" on Pinterest containing interesting exhibits of architectural images, vintage advertising and emphemera associated with these companies that highlight their longevity.

Ratings agencies such as A.M. Best,  Fitch, Weiss, Moody’s, and Standard & Poor’s analyze and rate the insurance companies that issue structured settlement annuities.

Companies offering structured settlement annuity contracts must be first approved by the Department of Insurance or Department of Financial Services in each state that they do business. 

State regulators evaluate the insurance company's solvency and its compliance with state insurance laws and other regulations. Insurers are subject to mandatory annual audits and other financial compliance measures. Insurer reserves must hold assets sufficient to equal or exceed the contractual payment obligations.

The assets backing the reserves may not be removed from the insurance company. Insurer general accounts support the obligations of the insurance companies, not the obligations of its parent company or other subsidiaries. 

A classic recent example of how that works would be in the 2008-2009 financial crisis.  Following the AIG bail out in September 2008, some expressed concern about AIG subsidiaries that issued structured settlement annuities, yet the reserves backing the obligations of those subsidiaries could not be invaded by the parent, or AIG Financial Products, which was the division of AIG that oversaw the credit default swap business that was at the root of the crisis.

Generally, under Federal law, life insurance companies cannot file for bankruptcy protection.

The only instance where structured settlement annuitants have lost money stems from 1980s era sales of Executive Life Insurance Company of New York structured settlement annuities, where it was argued in a 2012 legal proceeding  that New York state regulators mismanaged the assets of the ELNY estate after taking over the company in April 1991. 

Last updated May 4, 2024

Personal Settlement Annuity from Pacific Life | Post Settlement Annuity | Ah-Oh Annuity

by John Darer CLU ChFC CeFT MSSC RSP CLTC

The Personal Settlement Annuity is an option for settlement funds where constructive receipt has already occurred . With a Personal Settlement Annuity,  If constructive receipt has occurred  "oops" doesn't mean the "poops".  

Ah Oh! You Already Signed A Release the Other Day

There is a solution.  Not an apples to apples solution mind you, but a solution that can provide predictable, safe, secure and stable core income using structured settlement annuity pricing , which is often more favorable than traditional single premium immediate annuities (SPIA).  

A  Personal Settlement Annuity is only available to settling plaintiffs within a very short time after a settlement has concluded

The premium used to fund the personal settlement annuity must come from a settlement that was for payment of damages under IRC 104  (personal physical injury).

• Unlike payments from a structured settlement for damages, a portion of the payments from a personal settlement annuity is taxable.  
• Unlike a structured settlement annuity,  a personal settlement annuity must comply with  IRC 72(u)  [ for example, in order to avoid a 10% penalty, payments must begin within 13 months, begin at or after age 59.5, ,or be spread out over the life expectancy of the annuitant]
• Pacific Life  is the issuer of the Personal Settlement Annuity and is rated A+ by A.M. Best

Whether or not a Personal Settlement Annuity makes sense will depend on an individual's needs. Other forms of non qualified income annuities may also make sense and should be explored such as deferred income annuities (DIA) and/or indexed annuities.  These types of annuities may be used, among other solutions in combination, to help a settling plaintiff achieve his or her financial goals.

 

What is an Annuity Payment?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

What is an Annuity Payment?

An annuity payment represents the liquidation of principal and interest under an annuity contract.  An annuity payment can be made by check, or direct deposit to your bank account.

What is an Annuity Contract?

An annuity contract is a financial agreement between a life insurance company and its customer outlining each party's obligations. The customer pays a lump sum to the life insurance company as consideration for the promise to make payments in the future. Among other things, the annuity contract sets forth the amounts of payments, the mode of payments (e.g. monthly, annually, deferred lump sums) and the timing and duration of payments.

How Does a Structured Settlement Annuity contract differ from a Retirement Annuity?

With a structured settlement annuity contract, the annuity is typically applied for by a qualified assignment company as a "qualified funding asset" pursuant to IRC 130(d), or by a non qualified assignment company when resolving other types of cases. The qualified assignment company, or non qualified assignment company,  has assumed periodic payment obligations pursuant to a settlement agreement resolving a legal dispute or claim.  While the annuitant or payee owns the right to receive payments, he/she/it is neither the
or owner of the annuity contract.

Read more What Are Structured Settlement Annuities? Structured Settlements FAQ (4structures.com)

Who Regulates the Sale of Annuity Contracts to Consumers?

The solicitation of annuity contracts is regulated by your state insurance department*.  An active insurance license is required to be authorized to solicit consumers and place annuity contracts.  

• The life insurance company that issues the annuity contract must be licensed as an insurer in your state.
• The specific contract form for the annuity must be filed by the life insurance company with the state insurance department and approved for sale in  your state. Do not buy a contract that is not for sale in your state.
• Annuity contracts can only be sold to consumers by licensed life insurance agents or licensed life insurance brokers

* the solicitation and placement of certain types of annuity contracts, namely variable annuity contracts, also fall under watchful eyes of securities regulators.

Last updated July 21, 2024

 

 

 

Secondary Market "Annuities" Misnomer is Mainstreamed By Law Professors

by John Darer CLU ChFC MSSC RSP CLTC

LifeHealthPro.com claims to be a "vital online destination for life & health insurance advisors, designed to provide them with the essential elements they need to run their practice and increase their bottom line including breaking news, market trends, practice tips and more".

LifeHeathPro is not doing the industry or consumers  any favors by permitting the publication of an article by William H. Byrnes Esq. and Robert Bloink, Esq. on January 30, 2014 that misrepresents what a "secondary market annuity" is to advisors not familiar with the instrument, not to mention those who are already misrepresenting "so-called "secondary market annuities" to the public and is otherwise deficient, leaving out material information.

Right out of the gate the Byrnes and Bloink get it dreadfully wrong in their "Primer on Secondary Market Annuities"

LifeHealth Pro: "Most secondary market annuities (also known as “factored” structured settlements) are annuities that were originally issued pursuant to structured settlements, meaning that the defendant in a lawsuit (often a personal injury suit) is found liable and, rather than pay damages to the plaintiff up front, reaches an agreement with the court so that the plaintiff receives the right to guaranteed annuity payments over time".

FACTS:

• "Secondary Market Annuities" ARE NOT annuities. They are structured settlement payment rights as defined at IRC 5891(c)(2), which are being misrepresented as annuities. It is quite remarkable that Robert Bloink, a professor of tax in the Graduate Program of international Tax and Financial Services at San Diego's Thomas Jefferson School of Law and served as senior attorney at the IRS Office of Chief Counsel missed this, despite demonstrating in the article that they have some knowledge of IRC 5891.
• Structured settlements are by definition "settlements", the result of a negotiated compromise or so-called "meeting of the minds"  [ Contracts 101 professors?] A defendant IS NOT found liable. In fact many settlement documents  expressly state that the Defendant is not admitting liability.
• Settlement agreements are between parties to a lawsuit not with the Court. Note that a minor's or infant's settlement, or wrongful death case may require judicial approval of the settlement.

LifeHealthPro

"The court approval process is necessary because, while the plaintiff has received the right to income under the annuity, the defendant technically owns the annuity contract. Through this process, the parties enter into an assignment agreement that is presented to the court, which will approve or deny the transfer based on whether it is in the transferring plaintiff’s best interests".

FACTS

• The Defendant "technically" (or actually) does not own the annuity contract, the qualified assignment company does, in most cases.
• The assignment agreement entered into as part of a structured settlement factoring transaction is not the same as a qualified assignment used at the time the structured settlement is created in the first place, to resolve a lawsuit or dispute.

QUESTION

Is a plaintiff still a "plaintiff", or a "payee" or "payment recipient", years after a legal case is settled and the action has been withdrawn or discontinued with prejudice?

LifeHealthPro

"A secondary market annuity is often able to provide the client with a higher-than-average interest rate because the selling plaintiff typically must sell his income rights at a discount. The interest paid out under the contract, however, is governed by the original contract terms, which may provide for a rate that is much higher than today’s market averages"

FACTS:

• The annuity that is purchased under the structured settlement remains in place with the same owner, usually the qualified assignment company.
• Some sellers only sell a portion of their structured settlement payment rights.
• The effective interest rate to the investor in structured settlement payment rights is as good as a calculation on a software program called T-Value and how much the originator can get away with and still achieve judicial approval of the structured settlement transfer.

CONCLUDING COMMENTS

The San Diego lawyers opine that "What once was a niche market is gaining traction with the ordinary investor, and it is time for all advisors to get up to speed". Maybe it's time for Byrnes and Bloink to get up to speed!

Byrnes and Bloink speak little of the risks of Mom and Pop "ordinary investors", investing in structured settlement payment rights:

• Questions of whether statutory protections apply to investors in structured settlement payment rights in the event of insolvency oif the obligor or annuity issuer.
• Exposure to fraud risk that does not exist when one buys a regulated insurance product.
• Risk that a deal could unwind if the structured settlement transfer was later deemed to have not complied with a structured settlement transfer act.  Could that leave and investor in structured settlement payment rights holding the bag?  Read up on the Cathy Brenston v Settlement Funding case in Illinois and my blog posts about forum shopping. That may be just the tip of the iceberg despite what "cheerleading" certain "secondary market annuity" players may give.
• Buying serviced paper means a reliance on a go-between instead of directly with the annuity issuer.
• Structured settlement payment rights acquired in the secondary market are highly illiquid, while most regular annuities have liquidity features. Even the original structured settlement recipient has more liquidity than an investor.

And another shout out to members of Congress, Attorneys General and state and federal regulators as part of my advocacy for regulation of the structured settlement secondary market. If law professors, can get it wrong when educating advisors, can you imagine the trickle down effect on American consumers and investors?

 

 

 

Annuity Industry "B-Team" Plugs HIgh Yields | "Play At Your Own Risk"

by John Darer® CLU ChFC MSSC RSP CLTC

A retirement annuity company is offering 3.05% for 5 years, or so says the email solicitation that I received as a Connecticut resident where the product is not even licensed to be sold. 

More Food for thought

A. M. Best rates the company B+

Weiss rates the company D+

Here's what Weiss might be looking at

Bonds In or Near Default                                              21.2%  (Bonds are 55% of portfolio)
Problem Mortgages                                                          5.9%
Real Estate Acquired by Foreclosure                             23.9%
Total Non-Performing Assets/Surplus & AVR                    51.0%
As a Percent of Invested Assets                                      5.5%

Errors and Omissions insurance policies often have policy restrictions or exclusions if the insurance company is less

In the words of Planet Patrol "Play At Your Own Risk".  Not a place for the "Stray Cash Strut".

 

Annuities | Consumers Traditionally Focus on Investment Instead of Consumption

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Consumers largely said they do not understand annuity products, and consider annuities from an investment perspective rather than a consumption perspective; increased education about annuities and the value of lifetime income streams may increase the appeal of those products, according to the " 2013 Life-Annuity Consumer Markets Annual" a March 15, 2013 publication of Hartford Connecticut based Conning and Company.

“Most investment products are all about maximizing return, but annuities are doing something different, which is acting as a hedge against market volatility and longevity risk,” says Matt Sadowsky, Director of Annuities at TD Ameritrade in its monthly newsletter The Ticker Tape Monthly. “The primary reason we offer annuities is to help clients hedge the risk of outliving their assets. And once investors remove fear from part of the equation, they are better positioned to make smarter, less emotional decisions with the rest of their portfolio.”

Structured settlement annuities are not only for those who have suffered a catastrophic personal injury. 

If you are receiving a recovery for wrongful death or an employment related settlement, taxable damage settlement, or an attorney fee deferrals and structured attorney fees,  allocating part to a structured settlement can protect your recovery and possibly put you in a better position to make smarter, less emotional decisions with the remainder.

For more information about using annuities (including structured settlement annuities) as a hedge against market volatility and longevity risk please call John Darer at 888-325-8640.

 

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