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Structured Settlements and the Incentives That Complicate Them


Every year, thousands of individuals are involved in accidents that require years of medical care, often funded by a lump-sum financial settlement. Because it can be extremely challenging to manage such care with an all-cash settlement, many end up settling legal claims with a structured settlement. This means they trade a cash settlement for long-term, tax-free income that is funded by an annuity. It’s a wise decision and encouraged by the federal tax code, but did you know that special incentives are offered to financial planners who close such deals? It’s true, making it very important for consumers to be in the know.

A recent Kiplinger article tackled the subject of insurance incentives in the structured settlement industry, and while the author stated that he believes the situation calls for attention from Congress and state insurance regulators, he also suggested that it’s imperative consumers learn to protect themselves. The first step is to understand structure settlements and structure planners.

A structured settlement gives accident survivors a payment stream that spans several years, perhaps even a lifetime. Payments are funded by a life insurance annuity, and income is free of federal and state tax withholdings. In addition to the tax benefits, structured settlements offer long-term security, which a cash settlement does not. In most cases, a settlement planner. These professionals play a crucial role in quantifying long-term costs of therapy, medical care, prescription drugs, medical device replacement and other injury-related needs. The planner will then reach out to insurers to price the annuity needed to fund these payments. Last year alone, the 10 major life insurers who issue structured annuities issued a combined $5.5 billion in settlements, with an average of more than $230,000.

Most settlement planners are well paid, and a huge ethical problem is created when insurance companies additionally offer incentives for planners to steer injured clients to their annuity products. International trips, fancy golf events and other pricey rewards are often up for grabs, which begs the question: Will settlement planners push injury victims to accept certain insurers’ annuities even if there are better of less-expensive options?

According to LIMRA, evidence appears to show that these incentives do, indeed, affect what structured settlement planners promote to accident victims. For example, Pacific Life’s structured annuity sales fell almost 10% between 2013 and 2014, after the company stopped offering incentive trips. On the flip side, when the company announced a six-day trip to the Four Seasons in Bora Bora in 2015, sales skyrocketed and continue to do so. Pacific Life failed to comment when addressed.

While the structured settlement industry’s trade association has a Code of Ethics, structured settlement planners are not fiduciaries, therefore aren’t required to protect clients’ best interests. It is important to note that most planners act ethically, but evidence suggests that some may not. In an effort to protect yourself from the latter, here are some suggestions.

  • Have your broker confirm in writing if your acceptance of a structured annuity qualifies him or her, directly or indirectly, in an insurer incentive program.
  • Ask whether the planner’s company has a policy on acceptance of incentives.
  • Planners should provide annuity quotes from multiple insurers in writing. Life insurers or defense attorneys should then confirm the accuracy of said writing.
  • If the defense objects, insist on a plaintiff broker. Structured settlement brokers are paid by commission. If you bring in your own consultant, they split the commission with the defense at no extra cost to you.

Written by Rachel Summit

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