Q & A for Lawyer's Clients about Structured Settlements and the AIG Problem
September 18, 2008
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:
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Christopher R. Nichols, Attorney
Nichols Law Firm
Raleigh, NC 27609
800-906-5984 (toll free)
www.NicholsTrialLaw.com and www.nctriallawblog.com