Personal injury victims with severe disabilities can benefit from structured settlement annuities

A structured settlement is the payment of money for a personal injury claim where at least part of the settlement calls for future payment.  The payments may be scheduled for any length of time, even as long as the personal injury victim's lifetime, and may consist of installment payments and/or future sums.  Payments can be fixed amounts or they can vary.

With interest rates on annuities at historically low levels, in some cases less than 1%, the question must be asked: Why would a personal injury victim accept a fixed income annuity as part of a structured settlement? The answer is, "almost never" will an annuity make sense, particularly today with interest rates hovering barely north of 1%.  The fixed return on investment of 1%-3% is absurdly low and an annuity locks in this horrendous interest rate for the life of the annuity, and in most cases the rate of return is fixed for the lifetime of the personal injury victim.

Are structured settlement annuities worthwhile in some cases? Yes, but very rarely.  Let me explain: when life insurance companies receive a request for a quote for an annuity, they are sent the claimant's medical records and an underwriter will review the records in order to assign a "rated age" to the claimant.  A "rated age" is not the actual age of the personal injury victim, but rather, an age assigned to the claimant that takes into account his medical conditions, whether related or unrelated to the lawsuit. 

The substandard age rating may result from medical conditions that are related or unrelated to the lawsuit (i.e., the personal injury victim may be a diabetic, thus decreasing life expectancy). Medical conditions that are likely to result in a substandard age rating include alcoholism, high blood pressure, cardiac problems, cigarette smoking, drug addiction, heart attack, obesity, psychosis and ulcerative colitis.

For example, a 26 year old with a history of stroke and polycystic kidney disease may be given a "rated age" of a 48 year old.  This means that the underwriter at the life insurance company believes that the claimant has the life expectancy of a normal, healthy 48 year old.  When a personal injury victim has a rated age that exceeds their actual age, this is known as a "substandard age rating".

The term, "substandard age rating", means that an annuity issuer has decided that the personal injury victim's life expectancy is less than normal.  The shortened life expectancy results in a lower annuity premium when compared to a premium for a standard life for the same benefit payments. Accordingly, the personal injury victim can enjoy substantially higher monthly annuity benefits for the same premium.

For example, a four year old child suffering from cerebral palsy who is severely mentally and physically handicapped may be given a rated age of 70. This substandard age rating means that the life insurance company believes that the disabled child will have a life expectancy that is equal to the life expectancy of a normal 70 year old.  A normal 70 year old has a life expectancy of an additional 8 years and likewise, the annuity provider believes that the disabled 4 year old with cerebral palsy will only live an additional 8 years, as if she were a healthy 70 year old. 

Since the payments from an annuity are often limited to the life expectancy of the personal injury victim, the life insurance company can offer much higher annuity payment streams when the claimant has a "substandard age rating", such as in the example of a 4 year old child with severe physical and mental disabilities from cerebral palsy.  In the example of a child with cerebral palsy, the rate of return on an annuity will be much higher than it would be for a normal, healthy person as a result of the substandard age rating.

In the case of a severely disabled infant, a structured settlement annuity often makes perfect sense and provides a rate of return that cannot be matched by any other investment option.  This, however, is the only situation that an annuity makes sense for personal injury victims given their historically low levels of return at the present time.