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

Structured Settlement Lock Ins... What You Should Know

by John Darer CLU ChFC MSSC CefT RSP CLTC

What is a Structured Settlement Lock-in?

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: Pacific Life 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.

Carriers could remove or restrict 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.

Daily Rates Are Often an Important Cost Driver of Structured Settlements

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Structured settlement rates will vary by carrier according to the annuity issuer's investments, statutory guidelines as to reserves, surplus position, overall business plan and philosophy, whether or not there is a rated age and other factors.

Structured settlement brokers and settlement planners that have access to the wide spectrum of markets can shop the market of structured settlement annuity issuers for the most competitive rates. Structured settlement book rates must be set responsibly considering the large and varying flow of premium income and the fact that statutory guidelines of most states require the matching of assets to liabilities.

Annuity issuers of structured settlements circulate book rates (name "book rates" originated from "the old days" when a manual rate book or rate sheet and calculator were used) to structured settlement brokers on a regular basis. Book structured settlement rates change from time to time reflecting the general market conditions.

What Are Structured Settlement Daily Rates?

Structured settlement daily rates are an important part of the pricing process of creating structured settlements, structured installment sales of real estate or businesses,  and non qualified structured settlements/ non qualified assignments.

Most structured settlement annuity issuer or issuers offer daily structured settlement rate pricing when market conditions permit.

Taking into account the statutory asset/liability match requirements it may be possible in the spot rates in the bond market to find assets to match to the proposed liability (to the annuity issuer) created by the proposed structured settlement (which will permit better daily rate pricing). Please note that this is not always a given, particularly in periods of declining interest rates.

Minimum premium for structured settlement daily rate pricing is common, varying by structured settlement annuity issuer. Structured settlement daily rates may be extended until noon of the next business day to up to 10 days depending on the carrier with most being good "until the end of the next business day". If case negotiations are ongoing some will consider an extension on a case by case basis, if market conditions permit. One carrier will give greater extensions on cases with structured settlement annuity premium (to that annuity issuer) of over $3,000,000.

Good structured settlement brokers make it look easy but circus juggling talents are a prerequisite when rates are in flux.

The use of structured settlement daily rate pricing may be just the thing that bridges the gap between in negotiations over a hotly disputed item of damages. In another application it may be used to enhance the value of a policy limits offer where the defendant has limited coverage and no assets.

Artist Emil Rothengatter (a/k/a E. Ro or E.P. Roe). Images taken from "Art of The Circus"exhibit and used with permission of the Witte Museum, San Antonio, TX .

Last updated October 22, 2023

 

 

Structured Settlement Quotes | Funding Issues Related to Structured Settlements

by John Darer® CLU ChFC MSSC RSP CLTC

Here are some common issues related to structured settlement quotes and funding of structured settlements, which should be of importance to plaintiff attorneys, plaintiffs, insurance adjusters and defense attorneys and other interested parties or stakeholders in the structured settlement process.

Structured Settlement Quotes| How Long Are Structured Settlement Annuity Quotes Good For?

Let's say you are looking for structured settlement quotes, how long are they good for? The answer depends on the type of quote. A book rate may be good for 5-7 days while a daily rate may be good for 24 hours or less  A Treasury Funded Structured Settlement Quote is just an illustration. There are no lock-ins. The final numbers are determined when the Treasuries are purchased after funding. If you are making or accepting on offer based on a quote that has been given to you be sure to check for an expiration date. Some brokers place a disclaimer on the quote stating that "rates are subject to change unless the case is locked-in with a commitment to accept". If the quote is based on a rated age, the rated age must be valid. Generally rated ages are good for 6-12 months (depending on the structured annuity issuer). If a case has been pending for sometime, the rated age request must be renewed or the quote may not be valid. A request for renewal or reconsideration of the rated age determination is a good business practice. Occasionally a rated age has been based on aged medical information. New medical information can be helpful in improving the rated age if there has been a change in the plaintiff's medical condition.

Structured Settlement Quotes and Timing Issues

The timing of structured settlement funding may vary by (1) who is funding the structured settlement  ("the payor"); (2) the statutory requirements of the jurisdiction as to timing of payment (e.g in New York, per CPLR §5003-a prompt payment of settlement statute,  a defendant has 21 days to pay from the time he/she/it has been delivered the release of liability;(3) the nature and business practice of the payor (some stretch it out to the last possible day, others pay very quickly, or will even pre-fund the structured settlement prior to receiving a release); (4) whether Court approval of the settlement, or approval of the plan of distribution of the settlement proceeds, is required before releases can be executed; (5) whether the payor is a government entity, like the City of New York, New York City Health & Hospitals Corporation,  New York City Transit Authority or the State of New York, that has special funding consideration as to timing of payments; (6) whether the payor is a state insurance guaranty or liquidation fund or insolvency scheme of arrangement; (7) anything that may be stipulated by and between the parties;

A key factor in the pricing structured settlement quotes is the purchase date. This is the date that the annuity issuer expects the structured settlement funding. If the structured settlement funding arrives later than the purchase date it can affect the cost of the annuity. Why does it affect the cost of the annuity? As an example, consider an obligation to pay $150,000 in 10 years. If this has been priced based on a purchase date of December 1st with the payment date on December 1st, 10 years later,  it will have a particular price. If the structured settlement funding is not received on time and is instead received one month later on January 1st it is 9 years and 11 months until the payment date. Thus it makes sense that the cost could be higher.  Of course if interest rates were to rise in the interim then the price could be the same or better.

Playing interest rate trends with your or your client's money is a dangerous game

. If you are taking such calculated risks, you need to continuously evaluate whether those risks are working for or against you. Fortunately the the broker that creates structured settlements (i.e not the factoring company representatives masquerading as structured settlement brokers) have lock-in privileges with the annuity issuers. In exchange for the agreement to fund on a certain purchase date in the future the annuity issuers will generally agree to lock-in the interest rate associated with that quote. This is particular useful when Court approval is a required for the settlement.

Structured Settlement Lock-Ins

It's important to note that agreeing to a lock-in is a commitment.  The annuity issuer actually goes out and secures investments to balance the liability created by the periodic payment obligation (as is required under the insurance laws of most states). If interest rates rise in the interim and the plaintiff attorney, who previously agreed to the lock-in commitment, goes somewhere else to get a better rate the annuity issuer agreeing to the lock-in is left screwed. Occasionally an insurance company may be willing to extend the lock-in provided the annuity payment dates are moved a number of days commensurate to the days delay in funding. However the message is that you should exercise care in agreeing to a lock-in commitment. Use structured settlement rate lock-ins for the valuable tool that it is,  in the right situation. If you or your structured settlement broker abuses the privilege, the annuity issuer may not grant lock-ins in the future.