by John Darer CLU ChFC CSSC
A structured settlement lock-in (or lock in) is a critically important tool available to those who place structured settlement annuities such as structured settlement brokers, settlement consultants, settlement professionals and settlement planners. More importantly a structured settlement lock-in offers significant benefits to claimants, plaintiffs, defendants and insurers alike at the time of case resolution.
A structured settlement lock-in (or lock in) means that the structured settlement annuity issuer will guarantee the cost of a structured settlement, including the specific payment stream in exchange for the "quid pro quo" of a commitment to accept or purchase. The guarantee could be a week or, even a year.
What are the fees for a structured settlement lock-in?
While most structured settlement annuity issuers will lock-in with out charge for 30-60 days (update: one will do so for up to 6 months) , the longer lock ins generally require a rate commitment fee that is typically 0.2% of premium for each 30 days
Why would a party to litigation be interested in a structured settlement lock in?
- Secure the cost of a structured settlement payment stream that must be enumerated in a petition for Court approval of a settlement for minors or wrongful death action.
- Protect against downward interest rate fluctuations during the time period between the date that the parties have reached agreement to compromise and the date the structured settlement is funded.
- Protect the intricate weave of the rates in an integrated structured settlement plan with more than one structured annuity issuer.
- Increase parties satisfaction with the overall process
The potential consequences of no structured settlement lock in:
- Court could take months to approve a minor's settlement or wrongful death settlement at which time it is possible that the benefits in the petition cannot be funded at the same price. This would require the submission of a new petition for a revised benefit stream and needless further delays
- The intricate weave of an integrated structured settlement plan with more than one annuity issuer could be disrupted.
- You might get lucky and structured settlement rates will move in a positive direction for you between the date that the agreement to compromise is reached and the date that settlement documents are executed (note this difference!). The settlement documents must set out the specific stream of periodic payments.
- If the structured settlement payment stream is composed of deferred periodic payments the wrong guess could be devastating.
It's important to note that a lock-in is a commitment. It is a privilege granted by the annuity issuer. It is not a right. If you are going to gamble then gamble. If you want assurance then lock in. But you must understand that when a lock-in is submitted the carrier has to purchase assets to secure the benefit stream. If the case is not funded the annuity issuer may have to sell the bonds. Holding higher yielding bonds in a downward interest rate environment may not be a problem, but the reverse is true in a generally upward rate environment.
“Investors who bought bonds and bond funds for income and safety of principal are going to be surprised when they open their statements this month and find that they're down 6% or more,” Jeff Clark in The Growth Stock Wire June 15, 2007.
One carrier indicated to me that it has been flooded with requests to change lock-ins commitment by structured settlement brokers or settlement planners and hammered by lawyers with structured attorneys fee deals that threaten to pull out if they don't get a better rate.
I also understand that there is a structured settlement broker or two whose business practice appears to be to lock in a phantom benefit stream to get a rate before a benefit stream has actually been fully agreed to and then go back to the carrier with a modification. There may also be parties who will agree to lock-in with one broker and then go to another broker to circumvent the lock in.
One carrier is contemplating removing or restricting the lock-in privileges of structured settlement brokers, settlement consultants, settlement planners and settlement professionals who abuse the lock in process. It's important that ALL primary structured settlement stakeholders understand this process and what the commitment means.
Insurance companies want to be seen as having and, may be required to have, fair and consistent business practices.
Another caveat involves the use of lock ins for structured settlements emanating out of a 468B qualified settlement fund. Consider a case resolved with a single claimant 468B qualified settlement fund. The IRS could audit, review the activities of the single claimant 468B qualified settlement fund and conceivably argue that the pattern of agreeing to a lock in followed by the rejection of that lock in, followed by a one or more locks and re-locks for higher interest rates over a limited period of time demonstrates that the major purpose of the QSF was an economic benefit, an element of control, abusive, and not to resolve outstanding claims.
It's important to remember that a structured settlement lock in is a privilege granted by the annuity issuer and not a right.