“Our son sustained a horrible injury during birth that will require life-long medical care. There will be a large malpractice settlement. Our lawyer strongly recommends a structured settlement annuity, but my financial adviser says he can significantly grow the funds with proper, managed investments. What should I do?”
Interest in structured settlement annuities has been growing in 2024. Insurance companies issued about $2.6 billion of these specialized annuities from July to September, according to John Darer, a Connecticut expert on structured settlements. Darer sees demand for structured annuities topping $9 billion this year.
The reason for this growing demand is easy to see. Accident victims need a secure place for their settlement funds. Financial or political uncertainties could do real damage to stock portfolios.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Listen to your attorney! When a child is involved, financial planning is completely different from ordinary investing. There’s often no room for error. While stock investments have the potential for growth, they can and do fall, bonds can be called, and either can result in serious economic risk for your child.
After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column. "I love law for the reason that I can help people resolve their problems," he says. "I know it sounds corny, but I just love to be able to use my education and experience to help — simply to help. When a reader contacts me, it is a gift."
Since your settlement will include future medical needs that can’t be postponed, guaranteed payments are especially important. For example, burn injuries often require regular skin grafts and surgeries. These can’t be delayed because your stock values drop. The same goes for wheelchair replacement (every five years), paraplegia rehabilitation ($70,000 annually) and other post-injury costs.
Your child’s health is at stake, and you need financial security. Even a well-diversified mix of stocks and bonds can’t offer the guaranteed tax-free income you get with a structured settlement annuity.
Retain experienced counsel
“It’s good that your reader is working with an experienced personal injury attorney who can recommend a structured settlement professional to help design a payment stream that matches his child’s future needs,” Darer said.
He offered some other important information to know about this process:
Your biggest benefit: peace of mind. Ponzi schemes hit a seven-year high in 2023, according to the website Ponzitracker.com. If you get a large cash settlement, you can expect friends, neighbors, distant relatives and swindlers everywhere to hound you for money. They will pressure you for help repairing their car, going to Las Vegas or investing in crazy get-rich-quick schemes.
If you are someone who can’t say no, then your protection and safety lie in a structured settlement annuity held by an insurance company that pays according to the plan you designed with your attorney and settlement consultant. That way, no one can pressure you to put your future at risk. You get what is paid each month — nothing less and nothing more.
Your payments are guaranteed by a state insurance fund. Insurance companies are regulated at the state level, and each state has an insurance guaranty fund. These funds provide minimum guarantees (up to $250,000 in most states) in the unlikely case your structured settlement annuity holder becomes insolvent. The concept is similar to how the FDIC guarantees the first $250,000 of your bank account. Often, large settlements are placed with several insurance companies, assuring adequate protection.
Payments are exempt from income tax. Under the federal tax code, 100% of your structured settlement payments are exempt from federal, state and local income taxes. They are also exempt from taxes on interest, dividends and capital gains. This is an especially big benefit if you live in high-tax states such as New York, California, Illinois, New Jersey and Massachusetts.
No ongoing fees. Advised to have a stockbroker manage your settlement for you? Get ready to pay and pay and pay. Advisers charge in several ways including flat fees, commissions and an annual percentage of your assets. You may not deduct these fees on your taxes. By contrast, there are no ongoing fees with a structured settlement. The professional you work with on your settlement receives a commission from the insurance company. You pay nothing.
Three additional suggestions
Finally, if you consider a structured settlement, here are three suggestions I can make as a lawyer who has represented accident victims for over 30 years:
Make sure your structured settlement consultant has a certification. The University of Texas, among other institutions, runs a certification program requiring graduates to demonstrate competency in insurance and financial strategies. “The program does a good job in promoting industry competence,” says Peter Arnold, a certified structured settlement consultant for 20 years. “It’s also been effective in freezing out people outside the structured settlement industry, especially financial planners and the settlement purchasing industry.”
Get annuity quotes in writing. Many solid insurance companies issue structured settlement annuities. Make sure your structured settlement consultant gets quotations on the annuity cost directly from the insurer and in writing. Do not rely on a defense attorney or their structured settlement consultant.
Insist on written disclosure of “backdoor” benefits to your broker. A shady underside of the structured settlement industry involves swanky trips and other benefits insurance companies put on for brokers to gin up business.
Several years ago, I wrote about Pacific Life Structured Settlements offering agents a trip to Dubai and the Maldives. In my view, these trips violate financial trust and the industry’s written code of ethics. Make sure the consultant you work with discloses in writing any benefits, including junkets, they have received from insurers during the past three years and may reasonably be expected to receive in the next 12 months.
In a future story, we’ll look at the perils of selling your structured settlement.
Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.
Related Content
-
RMD Deadline April 1: Five Tax Strategies to Manage Your 2025 IncomeTaxable Income The April 1, 2025, deadline for required minimum distributions (RMDs) is fast approaching for retirees who turned 73 in 2024.
-
Rising AI Demand Stokes Undersea InvestmentsThe Kiplinger Letter As demand soars for AI, there’s a need to transport huge amounts of data across oceans. Tech giants have big plans for new submarine cables, including the longest ever.
-
How Much Does Being Rich Matter in Retirement?After a certain point, having more money in retirement won't make you any happier, new research shows. Instead, physical health, a sense of purpose, and a minimal amount of non-mortgage debt are more relevant.
-
The Three Biggest Fears Keeping Retirees Up at NightHere are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
-
What Can a Donor-Advised Fund Do for You? (A Lot)DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
-
Estate Planning When You Have International AssetsEstate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
-
Microsoft Stock: Innovation Spurs Its 100,000% ReturnMicrosoft's ability to recognize the "next big thing" has allowed sales – and its share price – to grow exponentially over the years.
-
6 Great Vacation Ideas for Wheelchair UsersThese six places provide plenty of travel inspiration for people who use wheelchairs.
-
Three Essential Estate Planning Steps to Protect Your Nest EggAfter dedicating years to building your wealth and securing your future, make sure your assets are protected and your loved ones are provided for in the future.
-
Is Chasing the American Dream Ruining Your Financial Life?Too many people focus on visible affluence as a marker of success. Here's how to avoid succumbing to the pressure and driving yourself into debt.
