Structured Settlement is the special form of compensation amount payable for any form of damage done to a party (like injury by medical negligence) by another party against whom the victim files a lawsuit. It consists of one part of the amount paid to the claimant initially and the other part of the larger amount which is paid out to that party through installments instead of paying the whole compensation as a lump sum. These installments can be variable depending on the agreement between the two parties like – a smaller annual amount for next 20 years or a larger amount per year for next 10 years etc.
Role of Life Insurance Company in Setting up Structured Settlement
It is important to understand where the insurance company figures in the whole process of setting up a structured settlement. The claimant holds the defendant responsible for paying him the compensation amount as directed by the court. Thereafter, the defendant passes on the responsibility of making these payments to an assignment company which purchases an annuity from a reputed life insurance company in order to make the claimant eligible to receive periodic and guaranteed payments from his structured settlement annuity. The Internal Revenue Service Code Section 104(a)(2)assures that the settlement payments received by the claimant from the contract are tax-free and even the interest rate received on this amount are free of all taxes. Moreover, generally the insurance company backing this stream of annuities is generally highly rated by the credit rating agencies so agreeing to a structured settlement obviously has a negligible risk. This makes these structured settlements secure and safe due to almost negligible risk.
But the important point is that the claimant is a mere receiver of the settlement payments and thus, according to the tax code, the claimant does not own anything except the claim to the payment. Actually the claimant cannot be the owner of the policy otherwise the tax-free arrangement would not be applicable. The defendant passes on the money and right to make payments to an insurance company who in turn, pays the money periodically to the claimant. Thus, the insurance company holds the right of ownership of the settlement policy, not the claimant.
Why Evaluate Financial Strength of The Life Insurance Company
Structured Settlements do come with a slight element of risk. In case the life insurance company goes bankrupt, the claimant would not be able to receive further payments in installments fro that company. But in order to avoid this risk, secondary guarantees are put in place to ensure stream of income to claimant if the primary company goes out of business. Nevertheless, it is important to judge the financial strength of the Life Insurance Company to be absolutely sure about the guaranteed risk free payments from the structured settlements to the claimant.
How to Evaluate the Financial Strength of Life Insurance Company
The financial strength of the life insurance company issuing the annuity to the claimant can be estimated and evaluated based on the following parameters:
Credit Ratings of the Life Insurance Company : The credit ratings system helps mark the creditworthiness of the companies on the basis of their ability to discharge all its financial responsibilities towards all stakeholders in the long run. The following important factors are judged and taken into consideration while doing this evaluation – capability to underwrite, efficiency in the working of the management and their degree of control, stock of resources to tide over difficult times of recession, depression or economic shocks etc. Based on these parameters all companies are awarded a grade of their credit worthiness starting from the highest A++, A+, A, B+, B, C+, C and C- (which is the worst of these all). Thus a claimant or his attorney must be careful to accept the annuity from only the very highly rated life insurance companies.
Ratings on Financial Size : The above mentioned ratings are only for the financial strength of the company but not for their financial size. These ratings are provided on the following parameters – surplus of the policyholders judged by the capital and surplus funds in companies and mutual funds, selected balance sheet items like adequacy of loss reserves on a present value basis, adjustments to market value of bonds, conditional reserves etc. Unlike alphabetical credit ratings, these ratings are done by a roman numeral ranging from I (smallest financial size) to XV (largest financial size)
Credit rating Agencies : The life insurance companies are also rated by the other credit rating agencies that conduct their own evaluation and analysis and provide a rating to the companies. A few such agencies are – Standard & Poor’s, Moody’s etc. The ratings of these agencies must also be taken into account while judging the financial strength of the life insurance company.