Structured settlements protect young injury victims | H. Dennis Beaver

"Our son sustained a horrible injury during birth that will require life-long medical care. There will be a large malpractice settlement. Our lawyer strongly recommends a structured settlement annuity, but my financial adviser says he can significantly grow the funds with proper, managed investments. What should I do?"

Interest in structured settlement annuities has been growing in 2024. Insurance companies issued about $2.6 billion of these specialized annuities from July to September, according to John Darer, a Connecticut structured settlement expert.

Darer sees demand for structured annuities topping $9 billion this year.

Listen to your attorney

Accident victims need a secure place for their settlement funds. Financial or political uncertainties could do real damage to stock portfolios.

When a child is involved, financial planning is completely different from ordinary investing. While stock investments have potential for growth, they can and do fall, bonds can be called and either can result in serious economic risk for your child.

Since your settlement will include future medical needs that can't be postponed, guaranteed payments are especially important. For example, burn injuries often require regular skin grafts and surgeries.

These can't be delayed because your stock values drop. The same goes for wheelchair replacement (every five years), paraplegia rehabilitation ($70,000 annually) and other post-injury costs.

Even a well-diversified mix of stocks and bonds can't offer the guaranteed tax-free income you get with a structured settlement annuity.

Your biggest benefit: peace of mind. "Ponzi schemes hit a 7-year high in 2023," according to the website Ponzitracker.com. Trust me, that if you get a large cash settlement, your friends, neighbors, distant relatives and swindlers everywhere will hound you for that money.

They will pressure you for money to repair a car, go to Las Vegas or invest in crazy get-rich-quick schemes.

If you are someone who can't say no, then your protection and safety lies in a structured settlement annuity held by an insurance company and pays according to the plan you designed with your attorney and settlement consultant.

You get what is paid each month – nothing less and nothing more.

Your payments are guaranteed by a state insurance fund. Insurance companies are regulated at the state level and each state has an insurance guaranty fund. These funds provide minimum guarantees (up to $250,000 in most states) in the unlikely case your structured settlement annuity holder becomes insolvent.

The concept is similar to how the federal FDIC guarantees the first $250,000 of your bank account. Often, large settlements are placed with several insurance companies, assuring adequate protection.

Payments are exempt from income tax. Under the federal tax code, 100% of your structured settlement payments are exempt from federal, state and local income taxes. They are also exempt from taxes on interest, dividends and capital gains.

This is an especially big benefit if you live in high-tax states such as New York, California, Illinois, New Jersey and Massachusetts.

Advised to have a stockbroker manage your settlement for you? Get ready to pay and pay and pay.

Advisors charge in several ways including flat fees, commissions and an annual percentage of your assets. You may not deduct these fees. By contrast there are no ongoing fees with a structured settlement.

The professional you work with on your settlement receives a commission from the insurance company. You pay nothing.

Finally, if you consider a structured settlement, here are three suggestions I can make as a lawyer who has represented accident victims for over 30 years:

1) Make sure your structured settlement consultant has a certification. The University of Texas, among other institutions, runs a certification program requiring graduates to demonstrate competency in insurance and financial strategies.

"The program does a good job in promoting industry competence," says Peter Arnold, a certified structured settlement consultant for 20 years. "It's also been effective in freezing out people outside the structured settlement industry, especially financial planners and the settlement purchasing industry."

2) Get annuity quotes in writing. Many solid insurance companies issue structured settlement annuities. Make sure your structured settlement consultant gets quotations on the annuity cost directly from the insurer and in writing.

Do not rely on a defense attorney or their structured settlement consultant.

Insist on written disclosure of "backdoor" benefits to your broker. A shady underside of the structured settlement industry involves swanky trips and other benefits insurance companies put on for brokers to gin up business.

Several years ago I wrote about Pacific Life Structured Settlements offering agents a trip to Dubai and the Maldives. In my view, these trips violate financial trust and the industry's written code of ethics.

Make sure the consultant you work with discloses in writing any benefits, including junkets, they have received during the past three years and may reasonably be expected to receive in the next 12 months.