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Prudential Suspends Structured Settlement Rate Book Pricing Due to Extreme Rate Volatility

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Due to extreme interest rate volatility, Prudential Insurance Company of America has announced that it has suspended its structured settlement rate book

Prudential ad from 1909   Image: Wikipedia

pricing until further notice, effective March 6, 2020.

What Does This Affect?

Just new structured settlement quotes from Prudential from March 6, 2020.  

Why is This Necessary?

Insurers must have assets to match against liabilities under state insurance regulations.  Large volumes of business coming in under book rates present challenges that are increasingly difficult to manage when rates are shifting at warp speed.  It is actually smart risk mangement on the part of Prudential.

Is This Unusual?

Not at all, Berkshire Hathaway Life of Nebraska and First Berkshire Hathaway Life do not have a published rate book and use daily price quotes for everything.  Berkshire is usually there or thereabouts at the top of the production ladder for structured settlement annuity issuers along with others.

How long has Prudential Been in Business?

The Prudential Insurance Company of America  (PICA), based in Newark, New Jersey,  has been in business since 1875. 

As of September 30, 2019 PICA had $1.5 trillion is assets under management, $286 billion in admitted assets and approximately $4 trillion in life insurance in force worldwide. In January 2020 Prudential Financial was ranked the most admired life insurance company in the world by Fortune Magazine for the second consecutive year. As of year end 2018 it had over $831 Billon in assets.

 

 

 

Life Settlements vs Structured Settlement Factoring Transaction Underscores "Secondary Market Annuity" Marketing Fraud

by Structured Settlement Watchdog

By examining the difference between a life settlement transaction and a structured settlement factoring transaction we can continue to home in on why the use of the term "secondary market annuities" to market factored structured settlement payment streams is a marketing fraud on investors.

What is a Life Settlement?

The sale of a life insurance policy is called a life settlement.  A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its net death benefit. In a life settlement transaction, the policy’s owner transfers ownership of the policy to the buyer in exchange for an immediate cash payment and, in some instances, a reduced interest in the death benefit for the policy’s beneficiaries. The buyer of the policy pays all future premium payments and receives the death benefit upon the death of the insured (when the policy matures). A life settlement is different from a viatical settlement in that the individual insured on the policy has a longer life expectancy. In a viatical settlement, the life expectancy of the insured is 24 months or less.

Step 8 in the Life Settlement Process "The insurance carrier is notified of the change of policy ownership and beneficiary to the new owner, the provider."

[ Source: Life Insurance Settlement Association]

What is a Structured Settlement Factoring Transaction?

The term “ structured settlement factoring transaction "means a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration". [ Source:  IRC 5891(c)(3)(A)]

IRC 5891 (c)(3 (B) Exception Such term shall not include—
(i)the creation or perfection of a security interest in structured settlement payment rights under a blanket security agreement entered into with an insured depository institution in the absence of any action to redirect the structured settlement payments to such institution (or agent or successor thereof) or otherwise to enforce such blanket security interest as against the structured settlement payment rights, or
(ii) a subsequent transfer of structured settlement payment rights acquired in a structured settlement factoring transaction.

Fundamental differences between a life settlement and a structured settlement factoring transaction

1. Life settlement involves the sale of an actual policy. A structured settlement factoring transaction does not.
2. A structured settlement factoring transaction involves the transfer of structured settlement payment rights not the transfer of annuity ownership
3. A subsequent transfer of structured settlement payment rights is not a structured settlement factoring transaction or a transfer of annuity ownership since the annuity ownership was not transferred in the first place.

Licensing

Life settlements are typically under the purview of state life insurance departments. In Connecticut for example, life settlement is a line of authority under an insurance license. The state regulator has the power to fine, suspend or revoke the authority. By contrast regulation of authority to engage in structured settlement factoring transactions, solicit annuitants, solicit investors in factored structured settlement payments streams is the exception rather than the rule.

 

 

  

 

 

Structured Settlement Annuities Are NOT Tax Exempt

by John Darer CLU ChFC MSSC CeFT RSP CLTC

There is a false narrative concerning structured settlement annuities that claims that structured settlement annuities are tax exempt. Structured

Structured settlement annuities are not tax exempt. The focus is on the damages

settlement annuities are not tax exempt. Where used as a "qualified funding asset"  the structured settlement payments may be tax exempt, but the essential reason for the tax exemption is the damages that the payments from the structured settlement annuities represent.

For example:

1. Payments for workers compensation  see IRC 104(a)(1)
2. Payments for damages on account of personal physical injury, physical sickness and wrongful death, see IRC 104(a)(2)   [and IRC 104(c) for Alabama wrongful death]
3. Payments for wrongful imprisonment, see IRC 139F

Structured settlement annuities can be used to fund the payment of damages in settlement of lawsuits comprised of many types of taxable damages. Even though they are funded with structured settlement annuities, if established properly each payment in such cases is taxed in the year received.

I'm sure that the false narrative is not intentional, but what is surprising is the false narrative is articulated in public facing communications by certain people and companies with credentials and experience. Those who spread the false narrative, even unintentionally, may be used as sources of "validation" for content barfers in (or serving) the structured settlement secondary market. Clearly this does not serve the greater good for consumers or the industry.

 

 

Structured Settlement Instead of a Health Savings Account?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

It has been suggested that using a structured settlement annuity is an alternative to Health Savings Account. While I respect the author of the suggestion, in

Health Savings Account (HSA)

my opinion such assertion cannot be applied categorically and each situation should be looked at indepedently. This blog explores the question below.

What is a Health Saving Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). A high deductible health plan requires a minimum deductible of $1,400 ($2,800 family) and maximum out of pocket limit of $6,900 ($13,800 family).

• Contributions are tax deductible
• Withdrawals from the HSA to pay qualified medical expenses are tax-free.
• If you claim a family member on your taxes, you can use your HSA money for their qualified medical expenses – even if you just have single coverage. 
• Interest grows tax-free
• Unused funds roll over annually if not used
• Contributions to an HSA reduce your Modified Adjusted Gross Income, which determines eligibility of subsidy under the Affordable Care Act  (ACA)
• HSA accounts are liquid and portable.

Is a structured settlement a viable alternative to an HSA in 2020?

• An allocation of damages from a settlement involving personal physical injury settlement proceeds used to fund a structured settlement annuity also grows income tax-free. In contrast to an HSA, claimants can use structured settlement annuity payments for medical and non-medical costs.
• Structured settlement annuities, while fixed, do not have any usage stipulations. The injured claimant can use the payments to cover out-of-pocket medical costs, or any range of other expenses, from daily living expenses to longer-term costs, like college tuition or retirement.
• No ongoing fees
• Structured settlement annuities have no contribution limits, so injured claimants have complete control over the amount they want to contribute to the annuity.... HOWEVER
• Money cannot be withdrawn from a structured settlement annuity like it can with an HSA. If there is a timing mismatch, the only way to get liquidity is a confiscatory sale of structured settlement payment rights via a structured settlement factoring transaction for pennies on the dollar. The liquidity from a structured settlement is such cases may take 90 days and is subject to a judge's approval. Being dinged for a monthly fee from an HSA bank account is far less than the structured settlement factoring "penalty"
• That being said, research shows that the best HSA accounts offer low fees, easy access, and excellent investment options. For example

Lively HSA

The monthly cost to own a Lively HSA is $0. Account opening fee; $0. Account closing fee; $0. Debit card fee (up to 3 cards per account); $0. 

The account is also FDIC insured and it currently yields the following interest rate (varies depending on balance size):

Less than $2,500       0.25% APY
$2,500 – $4,999         0.35% APY
$5,000 – $14,999       0.45% APY
$15,000+                  0.60% APY

And if you’re an investor, all accounts are attached to the TD Ameritrade platform. And as luck would have it, TD Ameritrade recently changed their fee structure, and all stock trades now cost $0.00.   Source: DoughRoller.Net

What are the HSA Contribution Limits for 2020?

The HSA contribution limits for 2020 are $3,550 for individuals and $7,100 for families. The catch-up contribution limit for those over age 55 is an additional at $1,000. If both spouses are 55 or older and not enrolled in Medicare, each spouse’s contribution limit is increased by the additional contribution. Each spouse must make the additional contribution to his or her own HSA.

Each situation must be looked at on its own merit.   Given a 360 degree look, structured settlements and HSAs are complemenary financial tools that can be used to serve a client's needs.   

 

 

 

Do You "Incur Interest" When You Accept a Structured Settlement As Broker Website Suggests?

by Structured Settlement Watchdog

A structured settlement brokerage firm has shattered the glass ceiling of incredulity, by  claiming a "popular choice among plaintiffs" is "delayed payments that don’t pay out until the plaintiff reaches retirement: To ensure a comfortable retirement, the money will stay out of reach and incur interest in order to grow the total amount". Well as Ben Marcus said "Submitting students to the rigors of learning seemed only to incur the wrath of many of them …— Ben Marcus, Time, 8 Jan. 2001

According to the Cambridge English Dictionary, the word "incur" means " to become subject to (something unwelcome or unpleasant) as a result of one's own behavior or actions". 

Are we expected to believe from the website of this entity,  that if you agree to a structured settlement with a delayed start date until retirement so it will (1) stay out of reach and (2) you will literally have to pay interest as the settlement planner states, and thereby be subject to something unwelcome or unpleasant, as a result of your own actions?  Now there's a real selling point!

Of course not, what the structured settlement consultant says is total howler since one DOES NOT "incur interest" in, or as a result of a structured settlement.

In the meantime, enjoy the Punnography™ !

Little Miss Muffit Sat on Her Tuffit Eating "Incurs and Whey"

Workers Compensation Structured Settlements | Qualified Assignments On or AFTER August 5, 1997 Filings?

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Workers Compensation Qualified Assignments for Structured Settlements

Qualified assignment only became available for workers compensation cases filed AFTER August 5, 1997.

The Taxpayer Relief Act of 1997 amended the Internal Revenue Code, adding workers’ compensation payments under IRC § 104(a)(1) to the language of IRC §130, making them eligible for qualified assignment the same as physical injury or physical sickness tort claim payments under IRC § 104(a)(2), but applicable to claims under workmen’s compensation acts filed after the date of the enactment of the Taxpayer Relief Act (August 5, 1997).

On or prior to August 5, 1997, workers compensation parties could only make limited use of structured settlements where the future periodic payment liabilities were assigned (at the Safeco Life's SAFECO National facility) or through reinsurance, where the employer was insured.

 

 

What is A Structured Settlement Broker?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

What is a Broker?

A person who serves as a trusted agent or intermediary in commercial negotiations or transactions. Brokers are usually licensed professionals in fields where

A structured settlement broker should hold one or more active insurance licenses

specialized knowledge is required, such as finance, insurance, and real estate. Their rate of compensation (called brokerage or commission) is determined according to custom of the particular trade or by law, and is computed commonly either as a fixed percentage of the value of the transaction or on a sliding scale (higher the value, lower the percentage).

Read more: http://www.businessdictionary.com/definition/broker.html

What is a Structured Settlement Broker?

A structured settlement broker is someone that holds at least an active life insurance license in one or more states and carrier appointments, who provides professional advice and places structured settlement annuities and other qualified funding assets. Structured settlement brokers may hold other professional licenses and provide advice and placement of financial vehicles pursuant to professional licenses.

How is a Structured Settlement Broker Compensated?

A structured settlement broker is paid by commission, either as a licensed and appointed agent of a life insurance company and/or as a licensed broker or producer. In a letter posted on the website of the New York Department of Financial Services, the Office of General Counsel opined that it would be unlawful for a licensed broker to pay a licensed agent who was not appointed by the annuity issuer.

Who Regulates Structured Settlement Brokers?

As a licensed insurance agent, licensed broker or producer, a structured settlement broker who places structured settlement annuities as part of the consideration for the release of legal claims, is regulated by the  laws of the states in which he/she/it  is licensed. The states control the sales and solicitation process and have the power to fine, suspend or revoke licenses. The annuity issuer can pull appointments as well.

What is a structured settlement annuity?

A structured settlement annuity is a contract issued by a life insurance company,  the primary use of which is as a qualified funding asset to fund obligations to pay future periodic payment obligations under a settlement agreement and pursuant to a qualified assignment agreement.  Qualified assignment agreements are governed by the rules set forth in IRC Section 130.  In rare circumstances, where are future periodic payment obligations are unassigned, the structured settlement annuity may be owned by the Defendant or its insurer.  Structured settlement annuities can only be placed by individuals and entities (1) holding an active life insurance license and (2) appointed/authorized by the annuity issuer for structured settlement annuities.

Can a structured settlement annuity be sold?

No, a structured settlement annuity cannot be sold. A structured settlement annuity purchased as a qualified asset is owned by an assignment company. The terms of the settlement agreement when the structured settlement was established do not grant the annuitant any ownership interest in the annuity contract. Only the rights to the payments may be sold, subject to the structured settlement protection act in the state of domicile.

 

Lump Sum Vs Structured Settlement

The Awarded a Settlement Vortex Sucks in News Organizations, Law Firms, Finance Textbooks, Settlement Planners

by Structured Settlement Watchdog

The awarded a structured settlement vortex is almost as viral as the "Plantiff" virus. But the former is a fundamental conceptual flaw while the latter is a

A jury doesn't negotiate a settlement or its terms. A jury does not award a settlement.

careless funny typo. 

What is astounding is the volume of people, that should be in the know, that are sucked into making the case for something that is not.

A Head Rattling Baker's Dozen of Awarded a Settlement "Boo Boos" 

1. Atlanta Journal Constitution has it really twisted with a title that says Georgia rape victim speaks about $1B Verdict and then in the same article says "a  rape victim was awarded a $1 billion settlement verdict"  May 23, 2018. A settlement verdict?
2. NBC News 26  " Florida Man Awarded a Settlement After Police Mistake Doughnut Glaze for Meth  October 15, 2017
3. Forbes' Tony Nitti takes two steps forward and three steps back with "In general, if you sue somebody and either win the suit or negotiate a settlement, your award is fully taxable under Section 61"  May 3, 2016
4. Chegg Study " You have been awarded a settlement of $12,000 per year for the next six years.. The fair rate is 9%. I offer to pay you $52000 for it now. Should you sell it?"   From A company that provides textbook solutions whose tag line is study smarter not harder. 
5. Los Angeles personal injury law firm describing how the settlement process works in a personal injury case  " When you are awarded a settlement in a personal injury case..."  April 23, 2016 still posted on firm's website
6. Settlement Planner "A Special Needs Trust may allow a disabled individual who has been awarded a settlement"  January 24, 2017
7. Same Settlement Planner " For example, if you are awarded a settlement of $350,000, but place it in a structured settlement annuity..." January 26, 2017
8. DRB Capital LLC factoring Company " When the claimant is found to have proved their case, they are typically awarded a settlement in cash terms" 
9. DRB Capital LLC has itself really twisted up here "If you’ve won a structured settlement in a lawsuit against an insurance company, then there are a lot of things that the courts will allow you to do with that money... But in many cases, the money you’re getting from the judgment is more than the amount you need to pay those bills, which means you can use it for other things by getting structured settlement funding"  [ Jim, Jason kindly get with the program please. It's on the Pig Crack page]
10. Elder law Firm New York "When an individual is awarded a settlement in a medical malpractice or personal injury suit, it is typically for more than just the medical expenses"  May 11, 2018
11. Tracy CA personal injury law firm " If you have been awarded a settlement after a personal injury cases (sic), you may wonder if you are facing a large tax bill" . The firm published the June 2017 blog in answer to the question are Jury Awards and Settlements Taxable?  Question counselors:  Do juries award settlements or do they approve settlements?
12. Seneca One factoring company in its  website "knowledge base" says " When a court decides that a death of a family member was due to a negligent or wrongful act of another individual, the beneficiaries can be awarded a structured settlement on the deceased’s behalf". 
13. Robin Roberts of Brightpath Financial Corp., misstates as fact "Fact 2: Structured Settlements offer value with restrictions. You have won payments for damages and have been awarded a structured settlement".  No you haven't.   [ Note: The Baker's Dozen of Settlement Boo Boos were all retrieved and compiled August 18-19, 2018]

Due to the very low bar the structured settlement factoring industry sets itself, such lack of fluency on the fundamentals is unfortunately to be expected (but not tolerated). But, how can a law firm not articulate the difference between a settlement and an award? How can a settlement planner not articulate the difference between a settlement and an award?  

The Eley Law Firm of Denver Colorado does an outstanding job of explaining the difference between a settlement and a workers compensation award.  They say:

 "A settlement is an agreement reached among the parties to a workers' compensation claim. This includes you, your employer and the workers' compensation insurer (unless your employer is self-insured). This is a type of contract, and it may bar you from seeking further compensation for your injury.

An award, on the other hand, is granted to you by the workers' compensation court. This may include medical benefits or other types of workers' compensation awards based on the specifics of your injury. For example, a judge can order — or an insurance company can admit for — temporary and permanent disability benefits. This isn't a settlement. You don't have to sign away any rights to get these benefits. If you need help determining whether you received an award or a settlement, we can help. We can review your situation and help you understand your legal options. We can also advise you before you accept an award or settlement"

 

Why care? Why let misinformation foster financial illiteracy? You're better than that.

David Klasing | "Disadvantages to a Structured Settlement Agreement"

by John Darer CLU ChFC MSSC CeFT RSP CLTC

An Irvine California tax attorney made an attempt to answer the above question 4 years ago.  There are a number of errors in the still live posting on the Orange county law/ accounting firm's website and still comes up in search results. I offer some commentary on that post in a effort to correct those errors.

1. Klasing places much emphasis is placed on the fact that the plaintiff cannot own the (structured) annuity. While true, the reality is that no structured settlement annuity issuer would even issue a structured settlement annuity with the annuitant listed as annuity owner. Even if paperwork were submitted with the annuitant as owner it would be rejected and no policy would be issued. This is nothing new. That's the way it has been for over 30 years. 
2. Klasing alleges, in part incorrectly, that the plaintiff typically cannot alter the amount of annuity payments (he, she, or it-in the case of a trust, receives), when there has been a process in place in California to do just that, since October 11, 2009.  Sale or transfer of structured settlement payment rights in exchange for a lump sum of cash is permitted provided the structured settlement transfer complies with state law.  Provided the law is complied with the annuitant effectively reduces the payments he, she or it receives.
3. Klasing errs in stating the plaintiff typically has no rights to the annuity greater than that of an unsecured general creditor when, since 1988, the footnote to IRC 130(c) reads "The determination for purposes of this chapter of when the recipient is treated as having received any payment with respect to which there has been a qualified assignment shall be made without regard to any provision of such assignment which grants the recipient rights as a creditor greater than those of a general creditor".  
   

Structured settlements provide a customized stable source of income that is income tax free for damages on account of personal physical injury, physical sickness, wrongful death [subject to IRC 104(a)(2)] , workers compensation [subject to IRC 104(a)(1)] and wrongful conviction/imprisonment [ subject to IRC 139F]. I like to use the metaphor of a "job you can never be fired from". The stable income can be helpful to rebuild financial lives, replace income from a former job, or the income contribution of a deceased spouse. It can help a college graduate get started in life without having to share a place with 3 people or work 3 jobs by necessity and have the stability to afford to take a lower paying internship or training program with good potential.