by John Darer® CLU ChFC MSSC RSP CLTC
New York City/New Jersey/Connecticut area structured settlement annuitants can have a much easier "commute" is available to with a structured settlement commutation rider, but you've got to get your commutation rider BEFORE you "start your journey!"
What is a Structured Settlement Commutation Rider?
A commutation rider is a structured settlement option, that serves to automatically commute all or a portion of future guaranteed or certain payments to a lump sum upon the death of the annuitant.
For the purpose of this post guaranteed or certain is intended to mean payments that will be made whether or not the annuitant survives the entire payment schedule.
A structured settlement commutation rider is useful where the structured settlement is of high quantum on a minor, or perhaps where the structured settlement is payable into a Special Needs Trust [in some jurisdictions (e.g. those in the immediate vicinity of New York City) a death commutation rider may even be mandatory under local rules, in order to receive Medicaid approval] where liquidity is needed to pay estate taxes, or in circumstances where it can be anticipated that beneficiaries would not benefit from an income tax free cash flow.
Structured settlement commutation riders upon death have been available since 1995, when Allstate Life Insurance Company obtained a Private Letter Ruling 9812027 from the Internal Revenue Service.
While there is no charge to include a death commutation rider, it must be embedded in the settlement agreement and qualified assignment at the time the structured settlement is finalized. The rationale for this is simple and is explained Private Letter Ruling 9812027. The commutation occurs through events outside the payee’s control. The payee has no ability to affect whether a commutation might occur, and the commutation was made to the payee’s beneficiaries, not to the payee.
While the method of calculation of the commuted amount payable varies by company generally there are two components:
- Method used to commute the future payments to present value
- Percentage of the present value that is then payable in a lump sum
Using the annuitant's date of death as a measuring point the annuity issuer may discount the future payments using a published index (if the date of death is weekend or holiday typically the next business day will be used).
Some annuity issuers will base the present value on the cost of a structured settlement annuity (based on rates in effect on the date of death) that would be sufficient to pay the remaining guaranteed or certain payments.