Structured Settlements Annuities and Funding Mechanisms 1 — Questions and Answers
Question 1: What type of annuity is most commonly used to fund structured settlements?
- Variable annuity
- Fixed annuity issued by a life insurance company (Correct answer)
- Equity-indexed annuity
- Immediate variable annuity
Correct answer: Fixed annuity issued by a life insurance company
Fixed annuities issued by highly rated life insurance companies are the standard funding vehicle because they guarantee the exact payment amounts specified in the settlement.
Question 2: Who owns the annuity contract in a typical structured settlement qualified assignment?
- The claimant
- The qualified assignee (Correct answer)
- The plaintiff's attorney
- The state insurance guaranty association
Correct answer: The qualified assignee
In a qualified assignment, the qualified assignee owns the annuity contract and is both the owner and annuitant-beneficiary controller, while the claimant is simply the payee.
Question 3: What is the purpose of state insurance guaranty associations in the context of structured settlements?
- To underwrite new structured settlement annuities
- To provide a safety net covering claimant payments if the issuing life insurer becomes insolvent (Correct answer)
- To regulate the amount of periodic payments
- To approve all structured settlement agreements
Correct answer: To provide a safety net covering claimant payments if the issuing life insurer becomes insolvent
State life and health insurance guaranty associations protect claimants by covering periodic payments up to statutory limits if the issuing insurer becomes insolvent.
Question 4: What is a 'rated age' in the context of structured settlement annuities?
- The legal minimum age to receive a structured settlement
- An older age assigned to a claimant based on medical impairment, reducing the cost of the annuity (Correct answer)
- The age at which payments must begin
- The rating assigned by A.M. Best to the insurer
Correct answer: An older age assigned to a claimant based on medical impairment, reducing the cost of the annuity
A rated age is an actuarially assigned older age given to an impaired claimant, reflecting shorter life expectancy and lowering the annuity premium needed to fund a given payment stream.
Question 5: What does 'cost of the annuity' represent in structured settlement negotiations?
- The total of all future periodic payments
- The present-value premium the defendant or insurer pays to the life company to fund the payment stream (Correct answer)
- The claimant's attorney fees
- The face value of the policy
Correct answer: The present-value premium the defendant or insurer pays to the life company to fund the payment stream
The annuity cost is the one-time premium paid to the life insurance company to purchase the annuity contract that will fund all future periodic payments.
Question 6: What happens to the annuity funding a structured settlement if the claimant files for bankruptcy?
- The annuity is immediately liquidated to pay creditors
- Future structured settlement payment rights are generally protected from creditors under federal bankruptcy law (Correct answer)
- The payments are suspended until the bankruptcy is resolved
- The insurer is required to pay creditors directly
Correct answer: Future structured settlement payment rights are generally protected from creditors under federal bankruptcy law
Under 11 U.S.C. §522(d)(11)(D) and many state exemptions, the right to receive structured settlement payments is protected from creditors in bankruptcy.
Structured Settlements Annuities and Funding Mechanisms 1
What type of annuity is most commonly used to fund structured settlements?