by John Darer® CLU ChFC MSSC RSP CLTC
What is a Structured Settlement Lock-in?
A structured settlement rate lock-in is an important interest rate shift protection privilege, available to structured settlement brokers, consultants, and settlement planners who place structured settlements for claimants, plaintiffs, defendants and insurers alike, at the time of case resolution.
If you lock in a structured settlement it means that the structured settlement annuity issuer will guarantee the cost of a specific payment stream (or payment streams) in exchange for a commitment to accept or purchase the structured settlement payment stream. The lock in guarantee could be a week or, even a year.
What are the fees for a Structured Settlement Lock-in?
You will find that most structured settlement annuity issuers will lock-in without charge for 30-90 days, the longer lock ins generally require a rate commitment fee that is typically 0.2% of premium for each 30 days. Pacific Life Insurance Company and Pacific Life & Annuity Company don’t charge lock-in fees for up to 6 months.
Watch my January 2011 video podcast on The Structured Settlement Lock in
Why would a party be interested in a structured settlement lock-in?
Here are some of the reasons that you may wish to seek a structured settlement lockin:
- You can secure the cost of a structured settlement payment stream that must be enumerated in a petition for Court approval of a settlement for minors or wrongful death action.
- You can protect against downward interest rate fluctuations during the time period between the date that the parties have reached agreement to compromise and the date the structured settlement is funded.
- If a defendant or insurer is also willing to fund the structured settlement in advance of court approval, even better. In one case that I worked on that was subject to delays in one of the New York City Surrogate Courts the financial difference from pre-funding was over $161,000!
- You can protect the settlement plan when more than one structured annuity issuer is used in a diversification
- When a structured settlement lock-in is used it ultimately increases parties satisfaction with the overall structured settlement process.
What are the consequences of no structured settlement lock-in?
- Court could take months to approve a minor’s settlement or wrongful death settlement at which time it is possible that the benefits in the minor’s petition cannot be funded at the same price. This would require the submission of a new petition for a revised benefit stream (which could be worse!) and result in needless further delays.
- The intricate weave of a diversified structured settlement portfolio with more than one annuity issuer could be affected.
- In cases involving minors, incompetents, wrongful death, or where court approval is otherwise needed, the settlement documents must set out the specific stream of periodic payments.
- If the structured settlement payment stream is composed of deferred periodic payments the wrong guess about which way interest rates will go could be devastating.
A lock-in is a commitment and is a priviliege granted by the annuity issuer and it’s appointed agent. It is not a right
Speculators can gamble. But when you are dealing with the needs of a catastrophically injured person with defined needs, is gambling prudent? If you want assurance then lock in. But you must understand that when a lock-in is submitted the carrier has to purchase assets to secure the benefit stream. If the case is not funded the annuity issuer may have to sell the bonds. Holding higher yielding bonds in a downward interest rate environment may not be a problem, but the reverse is true in a generally upward rate environment.
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