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Q & A for Lawyer's Clients about Structured Settlements and the AIG Problem

If you are a lawyer who sometimes helps your clients with settlements by recommending a structured settlement (annuity) the shake up of AIG should be a topic of conversation. 

I emailed one of my friends, Bryan Milner, who is a structured settlement broker and gave him a Q & A on questions I anticipate my clients will be asking about future (and past) structured settlements.  I thought this would be helpful for anyone who may be looking at a structure in the near future. 

Here are the answers to my questions from Bryan.

Alleviating Structured Settlement Fears- Q & A

My client is considering a structured settlement but the situation with AIG has them (and me) worried about the safety of an annuity investment.  Here are some of the questions I anticipate:

Q:  If the life insurance company holding my annuity fails, what happens to my structured settlement?

A:  The insurance companies are subject to regulations that require them to have assets set aside and earmarked solely for the purpose of meeting their obligations to policyholders .  Even in bankruptcy, these funds are not touchable, and would still be there for the purpose of honoring their commitments.   In addition, each life company that offers structured settlement annuities provides a guarantee from their holding assignment company that the scheduled payments will be made to the claimant.  A document with the details of the guarantee are included in each structured settlement annuity policy.   

Q: Are some "types" of structured settlements safer than others? 

A: Safety is based solely on the ability of the issuing life insurance company to pay claims.  Settlement annuities, and annuities in general, are well capitalized and regulated in efforts to help ensure the safety of the industry as a whole.  Pay attention to overall ratings and creditworthiness of the company you choose.

Q: Are Structured settlements "insured" or guaranteed by someone other than the company issuing them?

A: All states have a Guaranty Association Act.  The Act states that in the event that a member insurer, who is licensed to sell annuities in that particular state, is ordered to be liquidated by a court, the Guaranty Association Act enables the State Guaranty Association to provide protection up to a certain amount for its residents who are holders of annuity policies with the solvent insurer.   For example in North Carolina, the State Guaranty limit is $300,000.   

Q:  What is a qualified assignment?  And does it help protect the annuity? 

A:  The key word in Qualified Assignment is the word "Qualified".  It simply means that the assignment procedure, if done correctly, will allow benefits to "qualify" for beneficial tax treatment under 104(a)(2).  As far as the protection aspect, in most cases, the assignment company is a smaller affiliated company of the parent company that issued the actual annuity contract.  Again, in most cases, the assignment company's only assets are the settlement annuities that it owns.  There are no other prospective creditors that could have a claim on the assets of the assignment company.  It serves as a way of separating away from the parent's general creditors.  You can also consider a "secured creditor" status with many of the issuing life companies.  That level of security puts your policy higher up on the food chain when compared to a general creditor for payback if the issuing company fails and has to be liquidated.  A specialized Uniform Qualified Assignment and Release and Pledge from the life company would need to be signed at the time of settlement. 

Q:  If I have a structured settlement with Insurance Company A, can they "sell" my annuity to Insurance Company B like mortgage companies do?  Can Insurance Company B sell it to other companies? 

A: No.

Q:  If I already have a structured settlement, is there anything I can do to make it "safer?" 

A: No.  The settlement annuities are so well capitalized and reserved at the highest levels, we believe they are as safe as they can possibly be.  Regulatory agencies and state insurance departments have dramatically increased the reserve levels to help ensure the safety of annuities. 

Q:  Is it possible to "split" annuities among different companies to spread risk?  Would that also help to keep the annuity amount "under" the maximum coverage provided by the NC Guaranty Fund?

A: Yes, it is possible to "split" the settlement amount into different life companies for the structured settlement in order to stay under the $300,000 limit for the North Carolina Guaranty Association Act. 

Q: Historically, have any other annuity companies failed and left customers with nothing?

A: Not in the settlement industry.  Executive Life was the only carrier writing settlement annuities (back in the late 80's and early 90's) that went into receivership.  When they went into receivership the courts treated settlement recipients at a higher level since their money with Executive Life was "Settlement" money, not a traditional investment.  The courts instructed Executive and the assignment companies to pay 100% on the dollar for the remainder of all policies.  It was unfortunate that we had to experience that event (the Executive collapse) but it did show that the safety systems in place had the support of the court(s) and allowed settlement recipients to be made whole without interruption. 

Answers from:

Bryan Milner
Settlement Planner
Milner Plaintiff Services
an affiliate of Millennium Settlements
toll free:  877-212-9990
cell:   818-926-5100
fax:   818-302-1414

Questions by:
Christopher R. Nichols, Attorney
Nichols Law Firm
Raleigh, NC 27609
800-906-5984 (toll free) and 1.800.906.5984

Lawyers and structured settlements: what should a lawyer do for clients in the AIG crisis?

As I sat watching the AIG crisis unfold yesterday, I immediately started to think about the many structured settlements (annuities) that I have recommended over the years to my clients.  Structures provide a great way to allow large sums of money to gain interest (tax free) for injured clients.

I'm starting this blog entry to serve as a clearing house for information for personal injury lawyers seeking information to inform their clients about any risks now associated with using a structure.  I should also say that there may not be any significant risk, but at this point I can't find any definitive source that has analyzed the risks and benefits of structures in the economic and insurance crisis we may be facing.

I'll be updating this link as I find sources of information.  If you have come here seeking information and have a helpful link, please post it in the comments section and we'll add to the data base.

11:09 AM September 16, 2008

Update:  11:35 am

Looks like some of the folks who broker structures are starting to jump on the vacuum of information for lawyers in this situation. John Darer at 4Structures has written an article this morning on the subject.  He also gave me a call to discuss this. LINK to STORY  John says, in part:

First, the AIG core insurance business (life, health, annuities) is not what has caused the impairment.  AIG is a leader in many lines of insurance worldwide.The company operates globally on multiple silo business model. The toxic assets are confined to a single business unit.
Insurers must set claims reserves and actuary certification of asset liability matching is required by New York and most other states.
At the time of this writing there has been no announcement of  bankruptcy, but please note that Insurance regulators work to protect the interest of structured settlement annuitants. There is precedent. In re: Monarch Life bankruptcy creditors were not able to get at the structured settlement assets, even in the absence of secured creditor protections common in today's structured settlements. Executive Life annuitants are still getting paid and that impairment happened in 1991.
So what this says to me is that the insurers are set up in such a way that if the bad debts begin to destroy certain aspects of the business, other sectors will still stand.
John also discussed Qualified Assignments and how they add a second lawyer of protection.  You can find a list of Annuity Companies and where they do their Qualified Assignments here.

As i understand it, a qualified assignment and insurance agreement makes the client a secured creditor in the annuity contract.  This would give priority in bankruptcy, I assume. (checking on that).


My friend Bryan Milner who is affiliated with Millennium Settlements has sent me an email and is working on an article for his website at the moment.  I'll update later when he is finished with his post.

He pointed out that all of his products sold in NC have the protection of the NC Life & Health Guarantee Association, which is essentially the equivalent of the FDIC for insurance in NC.  From their website: 

The North Carolina Life & Health Insurance Guaranty Association is a statutory entity created in 1974 when the North Carolina legislature enacted the first version of the North Carolina Life & Health Insurance Guaranty Association Act (a link to the Act can be found in the Additional Info section). The guaranty association is comprised of all insurers licensed to sell life insurance, accident and health insurance, and annuities in the state of North Carolina. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guaranty Association Act enables the guaranty association to provide protection (up to the limits spelled out in the Act) to North Carolina residents who are holders of life and health insurance policies and individual annuities with the insolvent insurer. It also provides coverage for certificate holders of direct group policies or contracts and for unallocated annuity contracts.

So what sort of coverage does the Guarantee Association have?

If your insurance company fails, the maximum amount of protection provided by the North Carolina guaranty association for each individual is $300,000 no matter how many policies you bought from your company. The maximum coverage for an unallocated annuity is $5,000,000 per contract owner.

And of course, the Guarantee Association only kicks in if the insurer is licensed in NC.  How do you find out if they are?

How can I find out if my company is licensed in North Carolina?
Call the North Carolina Insurance Department at 800.546.5664. The department maintains complete and current records of all insurance companies licensed to do business in the state.

UPDATE 1:52 pm

CNN hasa  pretty good Q&A on AIG and why it affects a lot of folks.  It is certainly a "don't panic" post, but seems to reflect the information posted above about how assets are held and also how Guarantee Associations can step in if the insurer fails.

CNN 5 Things you Need to Know About AIG

Q:  I have insurance through AIG. How worried should I be about the problems at the company?

At least in the short term, you probably don't need to be worried at all. The problems are with the AIG holding company, not the individual insurance company subsidiaries that you do business with, according to a source with New York State's insurance regulator.

Even if AIG's holding company is forced to file for bankruptcy court protection, there's a good chance that the subsidiaries will continue to operate normally with no disruption in claims payments. That has happened in the case of other insurance holding companies bankruptcies in the past, such as Conseco

UPDATE Sept 17, 2008 1:30 pm

Well, looks like I bought myself some AIG.  And so did you, and you and you.  We all own AIG now since the Federal Government now owns 80% of AIG.  They are calling it a "bridge loan" but every "bridge loan" I've ever heard of did not have the lender taking over the company.  And it looks like "we" have replaced the CEO of AIG with the former CEO of Allstate.  Yikes.

Anyhow, some updates on what to do with structured settlements.  My frined and structure expert, Brian Milner, worked his fingers to the bone yesterday putting together some documents to address the AIG Issues.  You can find them at    Millenium AIG Q&A   & Protection for AIG Customers

Bryan has included some really good infomation in there.  I also sent him a Q & A late last night that I think my clients will be asking me.  As soon as he gets all of it answered, I'll post the response.

UPDATE Sept 18, 2008 10:00 am

Bryan has come through on the Q&A for me.  This particular thread is getting pretty long, so I'm going to post it in a new thread which can be found at: Q & A for Lawyer's Clients about Structured Settlements and the AIG Problem. 1.800.906.5984