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Structured Settlements |
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| Structured Settlement Annuities for Non-Physical Injury Claims |
Settling Employment and other non-physical injury claims by providing the plaintiff a stream of guaranteed periodic payments, rather than a lump sum, is truly a “win/win” for both parties. Structured Settlements benefit both the defendant/insurer and the plaintiff as a preferred vehicle when settling non-physical injury cases. Both parties may be able to resolve cases sooner and more economically; the plaintiff also benefits from deferring taxes and designing a payout plan to meet their specific financial needs.
Insurance companies and self-insured’s are looking to resolve their liabilities in non-physical injury cases. Structured Settlement annuities may be utilized to better resolve: ADA and ERISA liabilities, Attorney’s Fees, Director and Officers Liabilities, Labor and Employment Litigation, Discrimination, Environmental Litigation, Errors and Omissions Liability, Harassment, Legal Malpractice, Punitive Damages, Wrongful Termination, Construction Defects and many other Non-Physical Injury Claims.
If the plaintiff receives the proceeds in cash, they may have to payout more money than they actually receive from the award or settlement. Unlike proceeds from a personal physical injury case [IRC Section 104(a)(2)], proceeds received from a non-physical injury case are taxable income to the plaintiff. In addition, the plaintiff is taxed on the entire settlement, not just their “net” proceeds. In most instances the attorney fees and costs are not an above the line deduction for the plaintiff (Commissioner v. Banks, 2005). The American Jobs Creation act of 2004 does permit the plaintiff’s deduction of attorney fees on claims of unlawful discrimination. However, this leaves the majority of non-physical injury cases excluded under the provisions of this law.
The Banks decision requires that all taxpayers must declare fees paid directly to attorneys as income. This includes contingency fees. Legal fees won in a court award or settlement may be larger than the amount of the actual damages. Quite literally, the plaintiffs can find themselves losing … even when they’ve won!
For example, a Chicago woman won a court awarded of $300,000 in damages and $1 million to cover her legal fees (Spina v. Forest Preserve District of Cook County). She had to pay nearly $400,000 in taxes in addition to paying the attorney fee and costs. She lost nearly $100,000 even though she won the case.
Instead of accepting a fully taxable lump sum and losing most of it to taxes, a plaintiff can elect to collect proceeds in periodic payments, receiving the settlement over time. Although each payment is taxed, only a fraction of the total award is taxed each year as the payments are received. By spreading out the payments, the plaintiff may also reduce their tax rate to a lower bracket. In addition, an attorney can also accept their fee in the form of periodic payments and enjoy the same tax deferral benefits.
By entering into a Structured Settlement, the defendant/insurer and the plaintiff can tailor the annuity payments to meet a variety of financial needs, such as supplementing the plaintiff’s retirement planning, providing college education funds for their children or providing a stream of lifetime income. The Structured Settlement can be designed so that the plaintiff cannot outlive their money. At the plaintiff’s death, any remaining guaranteed payments can be paid to their heirs.
The defendant/insurer benefits from lower claim costs and transferring of any future obligations to the third party insurer paying the periodic payments to the plaintiff. The plaintiff benefits by receiving a much larger payout and deferring their federal/state/local income taxes over the term of the payout, rather than having to pay all of the taxes on the front end. |
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| Facts About
Structured Settlements |
| Concern |
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| Concern and uncertainty are dominant themes in this economic climate. The stock market has plummeted and financial institutions have been strained, some significantly. The question that must be addressed is how does all of this effect Structured Settlements and the promises that have been made to your clients? |
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| Facts |
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| The answer is that structures are a highly regulated and secure investment option and remain so even during the current economic climate. Here’s why: |
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- As of September 30, 2008, the life insurance industry held more than $4.o trillion dollars in assets, with a surplus of more than $257 billion (assets above and beyond what is required to cover all future liabilities). Because of the long-term nature of many insurer obligations, the assets set aside to pay them are invested conservatively – primarily in investment grade fixed income vehicles such as corporate bonds. This helps protect assets from excessive market risk. In addition, insurers purchase assets that match the future cash flow characteristics of their liabilities.
- Insurance companies are regulated by each state in which they do business. The number one goal of state insurance regulators is to protect policyholders by ensuring that insurers are solvent and able to pay claims on the policies they issue. State insurance laws require all insurers to establish “reserves” for every obligation they assume. In fact, each of the following state-mandated safeguards helps enhance an insurer’s ability to pay claims and help protect policy holders:
- Statutory Reserves – Mandated by state law, these reserves represent a conservative estimate of amounts required to fund future policyholder benefits.
- Cash Flow Testing – Regulators require insurers to perform periodic “stress tests” on their reserves, using a variety of interest rate scenarios. This testing helps assess how different market environments will affect an insurer’s ability to match meet their obligations.
- Minimum Risk Based Capital – These are assets above and beyond the amount required to fund all liabilities. This measure sets the minimum capital level required to avoid regulatory intervention and is determined based upon risks that are inherent in the industry.
- In the extremely unlikely event that an insurance company becomes impaired, state regulators have the authority to take immediate action, with the goal of helping the insurer build capital, repair operations and restore solvency.
- In addition to the minimum requirements outlined above, insurers typically maintain additional capital referred to as excess capital and surplus. These excess capital levels are required by independent ratings agencies and used by insurers to meet various financial strength and ratings thresholds.
- Despite the volatile financial environment, the life insurance industry remains well-positioned to withstand the crisis. Independent ratings agency, Fitch, estimated that at the end of 2008, insurers were likely to have about three times the minimum capital required to meet obligations.
- Parent companies cannot touch insurance company funds. They are protected by insurance regulation. For example, AIG’s parent company could not access the annuity division’s funds to help offset its losses.
- Even during extreme economic pressures, the strength of structured settlements passes the test. As recently pointed out by the Insurance Superintendent of New York, “The AIG situation is a great example of state regulation at work. Their policy holders were never at risk.”
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| Financial Strength |
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| It is a truism to state that structured settlements were built for times like these. Your structured settlement advisor should present to your client the ratings of the various annuity providers. The industry is currently seeing a “Flight to Safety.” Companies with A+ (Excellent) or A++ (Superior) ratings are receiving a significant portion of the business, and for good reason. These companies have beefed-up their capital reserves have been quite prudent with their investment portfolios. Many annuity providers are quite proud of their financial position and have been generating updated marketing pieces to tout their financial strength. (See Attached) These companies will survive this downturn and will reap significant benefit when the market comes back. (And it will come back.) |
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| UNDERSTANDING FINANCIAL STRENGTH RATINGS |
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Four key independent agencies – A.M. Best, Fitch, Moody’s and Standard & Poor’s – rate the financial strength of insurance companies. Financial strength ratings reflect the independent opinions of an insurer’s financial strength and its ability to meet ongoing insurance policy and contractual obligations. Ratings are based upon in-depth discussions with a company’s management team and a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile.
Each agency has its own proprietary rating scale, rating standards, population of rated companies, and distribution of companies across its scale. In addition to letter grades, each agency uses numbers, pluses and minuses to indicate minor variations in ratings from one rating class to another. |
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| A CLOSER LOOK AT A.M. BEST RATINGS |
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| A.M. Best defines A+ as “Superior” and A as “Excellent”. |
- A+: Assigned to companies that have, in our opinion, a superior ability to meet their ongoing insurance obligations.
- A: Assigned to companies that have, in our opinion, an excellent ability to meet their ongoing insurance obligations.
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| Illinois Probate Statute Ratings Threshold |
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| Structures are invariably preferred by the Courts for cases that involve disabled adults or minors. Moreover, while the Illinois Probate Statute sets financial strength requirement at an “A” rating (Excellent), most structure plans are provided by companies with a rating of A+ or A++ (Superior). Therefore, the overwhelming majority of structure policies exceed the statutory threshold for financial strength. |
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| Conclusion |
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| In a volatile economy, helping an injured person achieve financial security is more important than ever. Life insurance companies that issue structured settlement annuities are financially strong, subject to strict regulation, maintain rigorous capital and reserve requirements and earn solid financial strength ratings from independent ratings agencies. When it comes to providing injured persons with a guaranteed income stream specifically tailored to their needs, structured settlements – and the guarantees they offer – remain one of the safest and most solid values in today’s marketplace. |
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| What is a Structured Settlement? |
A Structured Settlement is an alternative to a traditional lump sum cash payment used in the resolution of personal physical injury, wrongful death and workers’ compensation cases. These payments to the injured party, or their survivors, are federal, state and local income tax-free.
The settlement usually consists of two components:
An immediate up-front cash payment to provide for immediate needs and;
A series of future periodic payments, which are funded by the defendant through the purchase of an annuity, or reinsurance, from a highly rated life insurance company. |
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| What advantages does a Structured Settlement offer the Plaintiff? |
- Payments are excludable from gross income under IRC Sections 104(a)(1) and 104(a)(2)
- Prevents the dissipation of settlement funds before required financial needs are met
- Receipt of a much larger amount of money than would be obtained in a cash settlement
- Plaintiff is protected from outside “investment advisors” or individuals seeking funds
- Variable annuity options
- Market competitive investment returns
- Extremely low risk
- No costs or service fees
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| What Types of cases are candidates for a Structured Settlement? |
- Lost future income replacement
- Continuing future medical expenses
- Need for secure, guaranteed and tax-free income
- Minors and incapacitated adults
- Inexperience in managing large sums of money
- Cases requiring preservation of government benefits
- Personal Physical Injury
- Wrongful Death
- Workers’ Compensation
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| Why are the benefit payments income tax free? |
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| Settlement payments under a workers’ compensation claim or claims for personal physical injury are excludable from gross income of the recipient under Internal Revenue Code Sections 104(a)(1) and 104(a)(2) respectively. |
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| What is a Qualified Assignment? |
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| The Periodic Payment of Judgment Act of 1984 (IRC 130) authorizes a “qualified assignment” of a defendant’s obligations to make future periodic payments to a third party assignee under a Structured Settlement Agreement. Once executed an assignment removes the defendant, and/or the defendant’s insurer, from the obligation to make future periodic payments. This obligation is then assumed by the assignee, which is usually a holding company or affiliated company of the Structured Settlement annuity issuer. |
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| What is the advantage of a Qualified Assignment? |
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| Once the qualified assignment is executed it removes the defendant or the defendant’s insurer from the obligation to make future periodic payments. This transaction may give the plaintiff greater protection by replacing a casualty insurer or self-insured defendant with a large life insurance company (more financially secure) which is then obligated to make the payments |
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| What is a Medicare Set-Aside Trust? |
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| In the settlement of workers’ compensation claims, a properly executed Medicare Set-Aside Trust (MSAT) helps protect a claimant’s future Medicare benefits; as well as, protecting the employer and insurance carriers from exposure under the Medicare Secondary Payer statute. A MSAT must be investigated if the claimant is currently a Medicare recipient at the time of settlement or the claimant is not yet receiving Medicare benefits and the total settlement value is over $250,000 (applicable if the claimant is reasonably expected to become a Medicare recipient within 30 months of the time of settlement). |
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| What is a Qualified Settlement Fund (QSF)? |
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| Qualified Settlement Funds were created by the enactment of IRC Section 468B in January of 1993. It is a special court ordered “safe harbor” to hold settlement funds from one or more settling defendants. The defendant and plaintiff(s) have agreed to the amount the defendant or their insurers will pay to settle the cases collectively, but not individually. The defendant may take a full tax deduction of the amount even prior to all of the claims for the funds being determined and allocated. The assets are not “constructively received” by the plaintiff(s). The QSF may enter into a Settlement Agreement with the plaintiff(s) and execute an IRC 130 Qualified Assignment. |
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| What are the advantages of a Qualified Settlement Fund (QSF)? |
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| The defendant receives a full cash release and a release of its policyholder’s liability. The defendant also receives a full tax deduction on the date the settlement amount is paid rather than when each plaintiff is paid. The plaintiff attorney has greater control of the settlement funds while also allowing more time for determining the proper allocation amounts to their clients. The plaintiffs also benefit by having the time to analyze the various financial planning options available to them before making their final decisions. |
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| What are our fees for services? |
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| You will never receive a bill for our services. Bradford Settlement Company consultants are compensated solely on a commission basis by the companies providing the annuity and trust products we recommend. We are your advisor whose primary goal is to assist you in the successful resolution of your case. |
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| Reasons you should use Bradford Settlement Company. |
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| Experience, innovation and creativity! Bradford Settlement Company’s consultants and administrative staff are among the finest in our profession. Our client services add value to your settlement negotiations. It is difficult at times to make a determination as to who will best serve your interests, and who will provide the most effective assistance in settling your case. While it is easy to tell you what Bradford Settlement Company can do, it is our actual performance that will ultimately convince you of our abilities. |
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“Your Structured Settlement Advocate”
Since 1981, Bradford Settlement Company has provided Structured Settlement advice and services to the injured and their counsel. Our consultants average over 15 years of experience in Structured Settlements, Financial Planning and Law. Over three-quarters of our consultants have professional degrees and/or professional designations. We believe that the lifetime financial decisions that will affect the injured are best decided by them, their guardians and their counsel.
Our duty is to determine your client’s financial needs, design the proper Structured Settlement plan to deliver those funds and select the most competitive and secure life insurance companies entrusted to provide those funds. We are also responsible for assuring you that your client’s settlement will not endanger any Federal or State benefits they may currently receive, or may be eligible to receive in the future.
A Bradford Settlement Company consultant is your Structured Settlement advocate! Our value-added services will provide you with detailed and comprehensive information to assist you in determining the value of your case and negotiating a settlement that maximizes your client’s benefits and security. |
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