Are Insurance Annuities Safe for Structured Settlements?

In view of the declining stock market and eroding consumer confidence, are insurance company annuities safe for structured settlements in the future?

The answer is a qualified “yes.”

I.  Things to Consider

Here are some things to consider before agreeing to a structured settlement in your case:

1. Do you need to protect the settlement from a potentially spendthrift child?  For example, if you are entering a settlement for a young child will you want to protect that child from wasting his settlement on fast cars and fast women when he turns 18 rather than use the funds for college and professional school?  Will the interests of your child be better served if you structure the settlement so that college is provided for?  Also, if the child is very seriously injured, will your child need the funds for future medical care and income? 
2. Do you need to protect the settlement from a potentially spendthrift and improvident injured loved one?   For example, if your spouse is seriously injured and will need lifetime medical care, will you want to make sure that the settlement is invested properly to pay for her future medical and income expenses? 
3. Do you need to protect yourself from yourself?  Are you a spendthrift?   Is there the danger that you will spend the hard fought settlement improvidently?  It is well chronicled that some seriously injured people have spent their settlement very quickly on luxury cars, gifts, and vacations.  A wise person knows if he has to protect himself against his own weaknesses.
4. Do you see a structured settlement as a means to manage your money?  The beauty of a structured settlement is that the injured person or his family make the money management decisions at the time of settlement.  There is no need to monitor and manage the funds thereafter.  There is no chance to get talked into investing in questionable or speculative investments.  Many injured people have little experience or comfort in managing money or investments.  
5. Do you want tax-free income from your settlement?  The income earned from the initial settlement is tax-free when paid to the injured party.

II.  Reasons to Avoid Structured Settlements

There are reasons to avoid a structured settlement, such as

1. You want to manage your own money.  You may feel that you can get a better return through your own efforts.
2. You want the freedom to use your money when you want to and as you see fit.  When you take an annuity you are living on an allowance, i.e., the regular payments of the annuity.
3. You have a distrust of insurance company annuities.  The financial crisis has caused many people to doubt the integrity of the financial system.  Prior to the crisis we have had many clients express distrust of structured settlements because they came from countries with unstable currencies and financial products.  Such clients would rather take the cash.

If you have any of the foregoing problems, then do not agree to a structured settlement.

III.  Things to Look for in a Structured Settlement

Now, if you have determined with your attorney and family that a structured settlement is best for you, consider the following to make sure that the annuity is safe:

1. The annuity should be with a major life insurance company with a rating of at least A+ from Best’s.  We are talking about major insurance companies, such as Met Life,  New York Life, and American General. 
2. The annuity should be from a company licensed in New York.  That means that the insurance company’s obligations will be guaranteed by the State of New York in the event that the insurance company goes bankrupt.  This is required by judges settling cases of infants and incompetents.  Never accept an annuity from a company which is not licensed in New York.
3. The annuity should be also guaranteed by another insurance company which is also licensed in New York.  This is the “suspenders with belt” approach that judges follow when approving settlements involving infants and incompetents.

IV.  Are Structured Settlements Safe?

Despite that fact that our financial system is in distress, I feel that structured settlement annuities are safe. 

The major insurance companies have not failed in meeting their annuity obligations.  There has been no indication that the major companies cannot pay on their annuities.  There has been an excellent history of life insurers paying on their settlement annuities.

Furthermore, structured settlements are but a small part of the annuity industry.  Most annuities are sold for retirement purposes.  If the insurance companies were to fail on their annuities, then there would be armies of elders rioting at the Met Life Building.

The major insurance companies are in good financial condition because they have been regulated by the individual states.

I think that in the future the insurance companies will be offering less favorable returns on annuities because the insurance companies will be getting lesser returns on their investments.  Nonetheless, the rigorous state regulation and oversight by the Insurance Department will help insure that the life insurers will stay honest.

Mark E. Seitelman, 10/10/08, www.seitelman.com.