The hidden costs of structured settlement annuities and the deceitful marketing practices of annuity providers

Around the time that a personal injury settlement is reached, the liability insurer will almost always bombard the personal injury victim with proposals for structured settlement annuities.  Instead of paying a lump sum, "cash only" settlement, the liability insurer proposes to pay the settlement through structured payments over period of years, known as a structured settlement annuity. What the liability will not show you are the hidden costs of the structured settlement annuities and the routine practices that they use in almost every case to mislead you into believing the annuity has far greater value that it really has.

Let's start with the basis: A structued settlement annuity is proposal to settle a personal injury lawsuit based upon a promise to pay periodic payments over a course of time.  For example, if you settle your personal injury case for $300,000, the liability insurer may agree to make monthly payments to you that will be made for the remainder of your life, even if you live to 105.  The insurer's promise to make the monthly payments to you is assigned to a life insurance annuity provider, such as MetLife or New York Life, and you agree to release your personal injury claim in exchange for the monthly payments from the life insurance annuity provider.  With a structured settlement annuity, you do not get a check from the liability insurer for $300,000, but instead, you agree to accept the periodic payments provided by an annuity.

What's wrong with structured settlement annuities?  In some cases, a structured settlement annuity can make perfect sense for severely disabled persons who will need monthy income to care for their medical and rehabilitation needs for the rest of their life.  However, even in those relatively few cases where a structured settlement annuity makes sense, there are hidden costs and deceptful marketing practices used by the liability insurers and life insurance annuity providers.

What are the hidden costs of a structured settlement annuity?  Although the written proposals for structured settlement annuities will say nothing about this, there is a four percent commission taken by the life insurance annuity provider.  The four percent commission is the standard commission charged by all life insurance annuity providers for their services and the commission is the same for every structured settlement annuity. If, for example, the inital amount of money that is spent to pay for the annuity is $1 milllion, you will be charged a $40,000 commission by the life insurance company.  That's a lot of money for the routine task of establishing an annuity.

Make no mistake about it: structured settlement annuities are big business for life insurance and liability insurers.  While there is nothing wrong with such companies charging for their annuities, the fees and commissions should be fully disclosed in clear writing to personal injury victims. Unfortunately, there is almost no disclosure of the fees and commissions to personal injury victims.

New York State enacted a law to rectiify this problem.  Pursuant to this law (General Obligations Law section 5-1701), the life insurance anuity provider must disclose the cost of the annuity.  The "cost of the annuity" means the amount of money that had to be paid by the defendant to the life insurance annuity provider to create the annuity.  For example, if the personal injury victim agrees to pay $300,000 for an annuity, the "cost of the annuity" should $300,000.  However, in some cases, the actual cost of the annuity will be less, i.e., the defendant will fund the annuity with $275,000 instead of $300,000 and that is never disclosed to the personal injury victim.  Who keeps the difference? The defendant pockets the difference between the settlement amount and the true cost of the annuity.

Did the New York law rectify the problem?  Not a chance.  While the New York law requires complete disclosure regarding the cost of the structured settlement annuity, the defendant almost always ignores the law and fails to provide the injury victim with an affidavit disclosing the cost of the annuity.  Thus, while it is admirable that New York enacted this law, it has been ignored by defendants and life insurance annuity providers.  Who's to blame?  Personal injury lawyers for failing to insist upon compliance with the law by defendants and annuity providers.

What are the deceitful practices of life insurance annuity providers?  When an annuity provider issues a written proposal for a structured settlement annuity, the proposal will have columns with huge dollar signs showing the "expected benefits" that the annuity will pay over the lifetime of the personal injury victim.  For example, an annuity costing $300,000 might show "expected benefits" amounting to $1.2 million over the beneficiary's lifetime?  Naturally, the personal injury victim will be impressed by the amount that he can receive over the lifetime of the annuity and hence, he will be more likely to accept the annuity over a "cash only" lump sum settlement.

The written proposals of life insurance annuity providers are very deceptful and designed to mislead the personal injury victim about the true value of the annuity.  Let me explain.  The written annuity proposal will show the "expected benefits" for a healthy person of the same age as the personal injury victim and will show the payments that will be made over the statistical life expectancy of a  healthy person.  Generally, the annuity company will only make the payments while the personal injury victim is alive and thus, the company's obligation to pay the annuity is dependent on the life expectancy of the beneficiary. If the personal injury victim has a medical condition that reduces his life expectancy below that of the normal health person, then he would not be expected to receive the annuity payments for as long a period of time as a normal, healthy person would.

If, for example, a 71 year old paraplegic is only expected to live an additional three years as a result of his medical condition, it is unrealistic for the annuity provider to list the "expected benefits" of a 71 year old using statistical life expectancy tables.  The statistical life expectancy of a "normal" 71 year old would be 9 years, but the personal injury victim might only be expected to live an additional 3 years.  The written annuity proposal provider completely unrealistic "expected benefits" in view of the 71 year old's medical condition that dramatically reduces his life expectancy. However, this is never disclosed in the written proposal of the annuity company and hence, the personal injury victim is misled into believing that the total payout of the annuity will be two to three times what it will be.  This borders on fraud!

Before you jump at a chance to get the "expected benefits" of a structured settlement annuity, keep in mind that the "expected benefits" in the written proposal are illusory and unrealistically portray the value of the annuity.  Bottom line: structured settlement annuities are not what they are cracked up to be.  Before you agree to place a portion of your settlement in a structured settlement annuity, get all the facts about the hidden costs of annuities and the deceitful marketing practices of liability insurers and annuity providers.