The Hidden Costs Of Structured Settlement Annuities

Around the time a personal injury settlement is reached, the liability insurer will almost always bombard the personal injury claimant with proposals for structured settlement annuities. Instead of paying a lump-sum, cash-only settlement, the insurer proposes to pay the settlement through structured payments over a period of years.

What the insurer will not show you are the hidden costs of these annuities and the routine practices used in nearly every case to mislead you into believing the annuity has far greater value than it actually does.

What Is a Structured Settlement Annuity?

A structured settlement annuity is an agreement to settle a personal injury lawsuit based on a promise to pay periodic payments over time.

For example, if you settle your personal injury case for $300,000, the liability insurer may agree to make monthly payments for the remainder of your life—even if you live to 105. The insurer’s obligation to make those payments is then assigned to a life insurance annuity provider such as MetLife or New York Life. In return, you release your personal injury claim and receive the monthly payments from the annuity provider.

With a structured settlement annuity, you do not receive a $300,000 check from the insurer. Instead, you accept periodic payments from the annuity company over time.

When a Structured Settlement Annuity Might Make Sense

In some rare cases, a structured settlement annuity can make sense for severely disabled individuals who require a steady monthly income to cover lifelong medical and rehabilitation expenses.

However, even in those limited situations, there are hidden costs and deceptive marketing practices used by both liability insurers and annuity providers.

The Hidden Costs of Structured Settlement Annuities

Although written proposals rarely mention it, every structured settlement annuity includes a standard four-percent commission charged by the life insurance annuity provider.

If, for example, the insurer spends $1 million to purchase the annuity, a $40,000 commission goes directly to the annuity company. That is a substantial fee for what amounts to a routine administrative task.

Structured settlement annuities are big business for life insurance and liability insurers. While there is nothing inherently wrong with charging for their services, the fees and commissions should be clearly disclosed in writing to personal injury claimants. Unfortunately, that transparency rarely happens.

How New York Tried to Address the Problem

New York State enacted a law—General Obligations Law § 5-1701—to require annuity providers to disclose the cost of the annuity, meaning the amount the defendant paid to create it.

For example, if a settlement agreement lists an annuity valued at $300,000, the true cost of the annuity should also be $300,000. However, in practice, defendants may fund the annuity with only $275,000 while representing it as worth $300,000. The $25,000 difference goes straight into the defendant’s pocket—and the injury victim never knows.

Why the Law Has Not Solved the Problem

While the New York law requires full disclosure, defendants and annuity providers routinely ignore it. They often fail to provide the mandatory affidavit detailing the cost of the annuity.

The result is that, despite the law’s good intentions, it has been widely disregarded. Who is to blame? In many cases, personal injury lawyers bear some responsibility for failing to insist on compliance from defendants and annuity providers.

The Deceptive Marketing Practices of Annuity Providers

When an annuity provider issues a written proposal, it often includes impressive-looking charts or columns showing large dollar amounts labeled “expected benefits.” These projections supposedly represent what the annuity will pay over the injury victim’s lifetime.

For example, an annuity costing $300,000 might display “expected benefits” of $1.2 million. Naturally, the claimant is impressed and more likely to accept the annuity rather than a lump-sum payment.

However, these proposals are deceptive. The “expected benefits” are based on the life expectancy of a healthy person, not the actual medical condition of the injury victim.

Why “Expected Benefits” Are Misleading

Annuity companies only make payments while the beneficiary is alive. Therefore, the true value of the annuity depends entirely on the claimant’s actual life expectancy.

If, for example, a 71-year-old paraplegic has a medical condition that limits life expectancy to three more years, using the statistical nine-year life expectancy of a healthy 71-year-old is completely misleading.

By basing projections on unrealistic assumptions, annuity companies exaggerate the “expected benefits” by two or three times what the claimant will likely receive. This practice borders on fraud and routinely misleads claimants about the real value of their settlements.

Protecting Yourself from the Hidden Costs of Structured Settlement Annuities

Before agreeing to a structured settlement annuity, carefully evaluate whether it truly benefits you. Remember that the “expected benefits” in the written proposal are often illusory and inflated.

Structured settlement annuities are not always what they seem. Before committing, demand full disclosure of all fees, commissions, and the true cost of the annuity. Do not let deceptive marketing practices from liability insurers or annuity providers dictate the value of your financial future.

If you have questions about the terms of a proposed settlement or want to ensure you receive the full compensation you deserve, consult an experienced attorney who understands the hidden costs of structured settlement annuities. They can review your proposal, verify the actual value of the annuity, and help protect your long-term financial interests.