by John Darer CLU ChFC CSSC
Mark Wahlstrom has published a good post entitled "The Golden Age of Structured Settlements" on The Settlement Channel. Mark lays out how an Obama Presidency coupled with the inevitable consequences of recent monetary policy make structured settlements an even more attractive option. While I share Mark's optimism (and alluded to the subject in my June 14 post, it is important not to lose sight of the fact that a structured settlement is one important alternative in the settlement planning process and that a complete needs assessment is appropriate.
An environment of rising taxes and inflation is going make liquidity needs even more important. For example, despite what "Mommy Warbucks"' Cybersettle Structured Settlements says, one cannot lock in a fixed rate of 2% today and expect that it will be sufficient to cover inflation in a rising inflation environment. 2% will be a joke if we return to the inflation rates of the early 1980s. Is there any question that over structuring leads to factoring and possibly factoring within the first 2 years of the structured settlement? Thoughtful planning after asking the right questions and listening will mitigate this possibility.
A rising interest rate environment will present administrative challenges for the structured settlement industry. As a trend of rising rates materializes I believe we will see greater desire to hold off making decisions to see if rates will improve. Plaintiff attorneys "jonesing" to get paid after years of litigation will need to be cautious about authorizing lock ins until they are ready to go. If you authorize a lock in and it takes you 3-4 months to draft that special needs trust (or to get that surrogate order) the market may have shifted dramatically. This is an issue for plaintiffs, defendants and intermediaries which will have to be clearly and carefully explained to clients. Consider:
- Litigants will want to buy more for their settlement dollars if they can.
- Rising interest rates will affect the discount rates to present value under New York CPLR 50A ad 50B for cases in litigation, as well as reducing the cost of funding the future damages to be paid periodically under a structured judgment.
- Rising taxes will affect the collateral source offset under New York CPLR 4546.
Structured annuity issuers have the opportunity to introduce new product enhancements to address these issues.
In my opinion the new NSSTA piece entitled "Structured Settlements: Protection During Economic Crisis" is generally good. There are two important points for any settlement professional to be mindful of:
1. While the majority of structured settlements have been funded via annuities issued by life insurance companies, not all structured settlements are funded in this manner. A structured settlement using the IRC 130(d) alternative Treasury Bonds as a "qualified funding asset" can match the security and financial advantages of an annuity funded structured settlement. There are other differences between the two types of qualified funding assets that are worth being part of the discussion.
2 Use of the NSSTA handout (as currently written) in a sales presentation to New York prospects may violate New York Insurance Law Section 7718, which expressly states:
"No person, including an insurer, agent or affiliate of an insurer . . . shall make, publish, disseminate,circulate or place before the public , or cause directly or indirectly, to be made, published, disseminated, circulated or placed before the public . . . any advertisement, announcement or statement which uses the existence of the [Guaranty] corporation for the purpose of sales, solicitation or inducement to purchase any form of insurance covered by this article, provided, however, that this section shall not apply to the corporation . . . or to prohibit the furnishing of written information in a form prepared by the corporation and approved by the superintendent by a member insurer directly to a policyholder in response to a written request therefor".