Structured Settlements Annuities and Funding Mechanisms 2 — Questions and Answers
Question 1: What is a 'structured settlement annuity' as distinguished from other annuities?
- Any annuity purchased by an individual for retirement
- A specific annuity contract issued to fund periodic payments in a tort or workers' compensation settlement, qualifying for favorable tax treatment (Correct answer)
- An annuity sold directly to the claimant
- A government-issued payment plan
Correct answer: A specific annuity contract issued to fund periodic payments in a tort or workers' compensation settlement, qualifying for favorable tax treatment
A structured settlement annuity is a specialized contract issued to a qualified assignee or defendant to fund tax-favored periodic payments arising from a personal physical injury settlement.
Question 2: Which of the following payment features can be included in a structured settlement annuity?
- Cost-of-living adjustments (COLA) tied to CPI (Correct answer)
- Adjustments based on stock market performance
- Early withdrawal options at the claimant's request
- Automatic conversion to a lump sum after 10 years
Correct answer: Cost-of-living adjustments (COLA) tied to CPI
Fixed annuities for structured settlements may include a COLA provision that increases payments annually by a set percentage or tied to the CPI.
Question 3: What is a 'split-funded' structured settlement?
- A settlement split between two plaintiffs
- A settlement that uses both an annuity for future periodic payments and an immediate cash component (Correct answer)
- A settlement funded by two separate life insurers
- A settlement that splits payments between taxable and tax-free portions
Correct answer: A settlement that uses both an annuity for future periodic payments and an immediate cash component
A split-funded settlement combines a lump-sum cash payment at closing with a structured annuity providing periodic payments, addressing both immediate and long-term needs.
Question 4: What is the significance of the 'free-look' period for annuity contracts used in structured settlements?
- It allows the claimant to cancel the annuity and receive a refund
- It allows the qualified assignee to review the annuity contract terms before finalizing the purchase (Correct answer)
- It is the period during which the insurer can decline coverage
- It allows the defendant to adjust payments without penalty
Correct answer: It allows the qualified assignee to review the annuity contract terms before finalizing the purchase
The free-look period gives the purchaser (qualified assignee) time to review the annuity contract for accuracy before it becomes irrevocable.
Question 5: What is 'mortality risk' in the context of life-contingent structured settlement annuities?
- The risk that the claimant outlives the guaranteed payment period
- The risk assumed by the life insurer that the claimant will live longer than expected, requiring more payments (Correct answer)
- The risk that the defendant will die before completing payments
- The risk that the annuity will be voided due to fraud
Correct answer: The risk assumed by the life insurer that the claimant will live longer than expected, requiring more payments
With life-contingent payments, the insurer bears mortality risk: if the claimant lives longer than actuarially predicted, the insurer must pay more than anticipated.
Question 6: Which document formally transfers the periodic payment obligation from the defendant to the qualified assignee?
- The annuity contract
- The qualified assignment agreement (Correct answer)
- The court order approving the settlement
- The release and settlement agreement
Correct answer: The qualified assignment agreement
The qualified assignment agreement is the contract by which the defendant (or its insurer) transfers its periodic payment obligation to the qualified assignee under IRC §130.
Structured Settlements Annuities and Funding Mechanisms 2
What is a 'structured settlement annuity' as distinguished from other annuities?