Watch out for annuity providers that misrepresent the benefits of structured settlement annuities.

When a personal injury case settles, my goal is very simple for my clients: preservation of capital.  This means making sure that my clients hold onto their money for the rest of their lives.  Easier said than done.  When a personal injury victim receives their check for a large settlement, 95% of them will spend, spend and then spend more until their money is gone.  If you think this won't happen to you, guess again--it happens to almost all pesronal injury victims.

Is a structured settlement annuity the answer?  Guaranteed stream of income that will give you monthly payments for the rest of your life.  Sounds good?  Not so fast.  For the moment, let's forget about the historically low rates of return offered by annuities today (one of my clients was recently offered an annuity with an annual rate of return of 0.29%).  Let's take a look at what you should watch out for when considering a structured settlement annuity.

When your case settles, the insurance company will present you with a dazzling array of structured annuity proposals.  The annuity proposals will show mind-blowing figures for the "total payout" of the annuity during the life of the annuity.  These often huge sums are designed to "wow you" into thinking you are getting the deal of the century.  Not so fast, my friend. 

Here's how it works: The life insurance company issuing the annuity will review your medical records to determine a "rated age" for you.  The "rated age" means the substandard life expectancy that you have as a result of your injuries and medical conditions.  For example, a 4 year child suffering from spastic quadriplegia may be given a "rated age" of 70 by the annuity company.  This means that the annuity company believes that the 4 year old has the life expectancy that is equivalent to a healthy 70 year old, i.e., about 8 additional years of life.

The annuity company rarely discloses the rated age on its annuity proposals.  However, the annuity proposals will contain astronomical figures reflecting the "total payout" over the duration of the annuity.  What the annuity company does not tell you is that it is virtually impossible that you will ever receive payments equal to the "total payout" in its proposal.  Why, you ask?

The "total payout" represents a sum of money that the annuity beneficiary will receive if he/she lives to the statistical life expectancy of a normal, healthy person of the same age.  For example, a 4 year old infant has a statistical life expectancy of an additional 76 years and the "total payout" figure on the annuity proposal reflects payments over that 76 year period.

Unfortunately, the annuity provider has already determined that the 4 year old suffering from cerebral palsy will not live an additional 76 years.  In fact, the annuity provider has determined, through its review of the infant's medical records, that the child will only live an additional 8 years.  Thus, it is misleading for the annuity proposal to provide an astronomical "total payout" reflecting a number of years of payments that it knows it will never pay.

The "total payout" figure is put on the annuity proposal for a specific reason: to entice the injury victim to buy the annuity.  It is simply misleading for the annuity provider to put huge dollars figures for a "total payout" in the proposal, when it has already determined that it will never pay that sum.

Annuity proposals will never disclose the 4% commission that they charge on annuities.  Don't you think it's a good idea to know how much you are being charged for the annuity?  Annuity providers don't.

At a minimum, you should know that annuity proposals can be very misleading and provide an inaccurate picture of what you are really getting.  Make sure you get the facts before you buy.