Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews

How Does a Life Annuity Work? What Is a Lifetime Structured Settlement Annuity?

by John Darer CLU ChFC MSSC RSP CLTC

A life annuity is an annuity that makes periodic payments to the payee for the rest of their life. 

What happens with a life annuity if you die?

If you have an annuity that is for life only, the payments cease when you die.  This is obviously a less desirable choice if you have beneficiaries. 

Why would anyone want a life annuity?

• A Life annuity is appropriate where long life planning and longevity risk is a concern is a priority or concern. “Not only are investors getting less return on their safe bond investments,” says Dr Michael Finke, Dean and Chief Academic Officer at The American College of Financial Services “They’re also living longer, so they need to fund more years of spending. The bottom line is that retirement is just more expensive today than it was in the past.” **  Also see Long Life Planning | Most Babies Born This Century Will Hit 100 Years Said Study - Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews (typepad.com)
• It's difficult to predict exactly when the end of your life will be. You can look at the mortality tables. You can take a guess based on the longevity of your parents and grandparents.  Unless your toes are turning blue, your veins are mottling and you can be observed in a Cheyne-Stokes breathing pattern, it's an educated guess.  A life annuity puts you on the life insurance company's figurative "payroll" until you die. With a life annuity you cannot be fired no matter how old you get. For many that is a great sense of comfort.
• A life annuity is also appropriate if the paying party in a lawsuit or dispute has a lifetime obligation to pay but the obligation ceases at death.

How Do You Provide For Beneficiaries When Establishing a Structured Settlement Annuity or Retirement Income Annuity? 

There are a variety of ways to provide for beneficiaries of life annuities with structured settlement annuities or retirement annuities:

Add a certain period.  A certain period  provides that paymnets will be paid for life, but at least for a minimum certain period of time whether or not the payee is alive when the payment is due.  So if there are monthly paymnets for life with 25 years certain it means that payments will be made for 25 years (300 monthly payments) whether or not the payee is living and then only if the payee is living from month 301 onward. 

Add a certain period and a commutation rider   A commutation rider provides for the payment of a lump sum at the death of the payee instead of ongoing payments.  Depending on the life insurance company, the commuted lump sum is generally between 90-95% of the present value of any remaining certain payments discounted as of the date of death and in accordance with a formula set forth in the annuity contract. A commutation ride must be selected at the the structured settlement is established. Also popular where a structured settlement is used as funding component of a special needs trust.

Buy Life Insurance      A life insurance policy will provide an income tax free lump sum at the death of the insured.  This is only an option if the annuitant is insurable, but at certain ages, where the annuitant is a good risk,  it may be a more effective solution than adding a certain period whose value diminishes the longer a person lives.  Underwriting is required.

Installment Refund    The annuity pays for life but guarantees that at least the amount of the premium will be paid out. If the annuitant dies prior to the amount of premium being paid out, the balance of the premium amount is paid in installments.

Cash Refund    The annuity pays for life but guarantees that at least the amount of the premium will be paid out. If the annuitant dies prior to the amount of premium being paid out, the balance of the premium amount is paid in a lump sum.

Each of these options has a cost factor that needs be evaluated against financial resources and the unique set of facts and circumstances of each case.

** "How much do you need in retirement? More than you think"  Feb. 7, 2017  USA Today

Last updated April 28, 2024

 

 

 

Structured Settlements' Longevity Protection Lauded by Insurance Actuary

by John Darer ® CLU ChFC MSSC CeFT RSP CLTC

Longevity protection is one of the important benefits of structured settlements with lifetime benefits.

An experienced veteran insurance actuary opined about about longevity protection and structured settlement annuities:

1. The claimant could make an excellent investment decision that out performs the structure in terms of IRR calculated at issue and still run out of money because they live "too long", longer than estimated.
2. Life expectancy does not reflect when someone will die, it means 50% of people will die before then end of life expectancy and 50% of people will live longer, many much longer.
3. The fact that life expediencies are increasing every year and there is a greater than 50% chance of outliving life expectancy.     -Debbie Fickett-Wilbar
   

It could be a long way baby!

"Americans worry more about running out of money than death"  Allianz June 4,  2023

When you have a structured settlement,  deferred income annuity, or a retirement annuity with a lifetime benefit option, the life insurance company that issues the structured settlement absorbs the risk of you being part  of the 50% that live longer.

Structured settlements provide customized income streams to address what most people worry about the most 

Last updated January 15, 2024

 

Long Life Planning | Most Babies Born This Century Will Hit 100 Years Said Study

by John Darer CLU ChFC MSSC CeFT RSP CLTC

"Very long lives are not the distant privilege of remote future generations -- very long lives are the probable destiny of most people alive now in developed countries"  -Aging Researcher

"Very long lives are not the distant privilege of remote future generations -- very long lives are the probable destiny of most people alive now in developed countries," Kaare Christensen of the Danish Aging Research Center University of Southern Denmark, Denmark, and colleagues. wrote on Friday in a study published in The Lancet  Vol 374, Issue 9696 pp1196-1208 3 October 2009.

A key question raised in the study was, are increases in life expectancy accompanied by a concurrent postponement of functional limitations and disability?

They say the answer is still open, but research suggests that ageing (sic- US) processes are modifiable and people are living longer without severe disability.

The researchers said that "should life expectancy in developed countries continue to improve at the same rate" (as it did for the 20th century... +30 years increase in life expectancy over the course of the century), "most babies born in rich nations since 2000 can expect to live to 100 years"

Most babies born in rich nations since 2000 can expect to live to 100 years!

1. What will be the impact on personal injury settlement planning for  plaintiffs?
2. How will a settlement planner make protecting against longevity risk a compelling decision in a "cash now" society?
3. What skills will tomorrow's settlement planner need?
4. What is the long term impact of this information on in force structured settlement annuity business for insurance companies?
5. Does this research portend a greater demand for longevity products, including structured settlement annuities and deferred income annuities, even before taking into into account future interest rate increases and tax increases?
6. What new products are being developed to deal the added longevity?
7. Dissipation Myth proponents are obsessed with the validity of squandering plaintiff theory. It is perfectly logical to hypothesize that failure to consider and address long life planning and longevity risk may cause dissipation. To what extent have those individuals considered the effect of longevity on dissipation?  To what extent have those individuals considered longevity risk in terms of structured settlement public policy?
8. What could regulators and legislators be doing to address this issue?
9. What could the National Structured Settlement Trade Association (NSSTA), Society of Settlement Planners (SSP), and American Association of Settlement Consultants (AASC) and their respective members, be doing to increase financial literacy about long life planning and longevity risk?

Last updated April 28, 2024

 

  

 

Annuity Issuers Addressing Longevity Risk as Research Concludes People Are Living Longer

by John Darer CLU ChFC CSSC RSP

A recent memo from Liberty Life Assurance of Boston's Tom Donahue to its brokerage force detailed Liberty's recent project involving extensive research of medical data and a detailed and complex mortality study, which has brought them to the same conclusion that the medical professionals, financial planners and others have already drawn, people are living longer. 

With advancements in medicine and medical treatments, people who were once experiencing shortened life expectancies for certain conditions are no longer necessarily facing that fate. 

Almost across the board, conditions are being treated more effectively, allowing for life expectancies to increase.  For instance, it is no longer unusual for an individual to reach their 100th birthday or even higher.  The vast majority of these 100 year olds are living with medical conditions associated with their age but many are living quite well due to advancements in medicine.

Annuities protect against the risk of outliving your income ( as one gets older one appreciates the subtleties of why "living too long" is probably not a good feeling sales pitch). The mortality risk to the insurers of annuities is on the opposite pole to life insurance. If the insurers guess wrong on your life expectancy and the concomitant reserve setting, they lose and must pay claims out of available surplus. If they guess wrong on a lot of people or  advances in medicine mean significant blocks are going to exceed expectations then there is a bigger drag on surplus.