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Structured Settlements

Structured-SettlementsA structured settlement is a financial arrangement utilizing insurance to settle a claim. Structured settlements offer an alternative to lump sum settlements. With the authorization of CRA and acceptance by the court a structured settlement can be used to settle a claim with additional benefits to both parties. With a structured settlement the claimant receives more money. The defendant pays out less money than would otherwise be required to pay with a lump sum settlement. A structured settlement is a win win financial arrangement for both parties, the claimant and the defendant.

At Stone-Hedge Financial Group Inc. we take the time to listen to the needs of the claimant. An injury can often set one back financially and an immediate lump sum may be required to pay off debts accumulated while injured. For those less fortunate that are unable to return to gainful employment a mortgage may be outstanding that will have to paid off. The money will have to last many years, until one is eligible for retirement benefits and to pay for ongoing medical expenses and treatment. For some no longer able to look after themselves additional ongoing living expenses will have to be paid for domestic help. The courts can award damages they cannot restore your health. No amount of money is worth suffering a permanent injury, however the only remedy available is a financial settlement.

The claimant can choose to settle their claim to meet their financial obligations and to provide income to meet future financial obligations and living expenses. In some cases the claimant will not have the option to settle the claim in the most financial advantageous manner due to debts that have to be paid that the claimant has accumulated during the legal proceedings. We can work with the claimant to meet their personal financial needs.

The options for settling a claim is to take a lump sum settlement, purchase an annuity, or a combination of both. As insurance brokers we only deal with annuities, lump sum settlements are paid directly to the claimant. 

A structured settlement imposes financial discipline on the claimant. Too often with a lump sum settlement the claimant spends the money and lacks the financial discipline to manage their finances. With a structured settlement payments can be structured to meet the needs of the claimant and guarantee that the money will be there when needed. There are many additional benefits to a structured settlement versus a lump sum settlement.

Annuity Options for structured settlements:

Term Certain Annuity: The annuity payment income stream is paid for a set specific period of time. Once the insurance company pays out all the benefits to the claimant the payments stop. Payments can be paid for a pre-determined number of years or up to a certain age. The claimant may have a pension at retirement, they will require less money at retirement and more money prior to retirement.

Lifetime Annuity: The annuity payment income stream is guaranteed for the duration of the claimant's lifetime. Lifetime annuities can be purchased with a minimum guaranteed payment period or without a guaranteed period. If the claimant's objective is to receive the maximum amount of income, then a zero guaranteed payments period option will be the most attractive. If the claimant's objective is to leave money to the estate or beneficiary, then they can choose a minimum guarantee period when purchasing their annuity. The guarantee period can be one year to forty years. The longer the guarantee period the lower the periodic annuity income payment stream the claimant will receive.

Lump Sum Payments (also called balloon payments): This option can be added to an annuity to provide a pre-determined amount to be paid to the claimant at a future date. The claimant may wish to pay off their mortgage when it comes up for renewal, pay for their children’s education, or require funds for future investment opportunities.

Indexed Annuities: Annuities can be purchased with an indexation option to offset the rising costs of living expenses. Over time inflation can erode the purchasing power of the annuity payment income stream. Payments can be linked to the Consumer Price Index (CPI) or a specified percentage that will increase annually.

Who pays the benefits and what are the guarantees?

The life insurance company issues the annuity income payment stream for the life of the contract. The life insurance company is a Canadian federally-registered insurer regulated by the Office of the Superintendent of Financial Institutions (OSFI). The life insurance company must have a Standard & Poor’s rating of BBB or higher in order to issue the annuity for a structured settlement.

We will caution anyone relying on ratings alone when selecting an insurer. What one can rely on is Assuris. In the event the insurance company goes bankrupt your annuity income payment stream is insured. Assuris guarantees an annuity income payment stream of $2000 per month, per insurance company, or 85% of the annuity income payment stream, whichever is higher.

In order to benefit from the preferential tax treatment of a structured settlement the claimant cannot be the owner of the contract. If the claimant would be the owner of the contract it would be taxed. The casualty insurance company is named as the owner of the annuity for the entire period of the annuity payment income stream, including any future balloon lump sum payments.

What are the benefits?

With a structured settlement all payment are tax free to the claimant as per CRA taxation interpretation bulletin  IT365R2. INCOME TAX ACT - Damages, Settlements and Similar Receipts. In the event of death of the claimant, the named beneficiary would receive a tax free amount. The death benefit depends on the type of annuity the claimant purchased to settle their claim, not all annuities provide a death benefit. If the claimant was to receive the money personally in a lump sum amount and invest it all interest earned would be taxable as income. If the claimant invested the money in mutual funds, stocks or exchange traded funds they would have to pay commissions, transaction fees and management fees. All dividends and capital gains would be taxable and there would be no guarantee the money will last. In addition the claimant can lose their money with higher risk investments.

Structured settlements provide the claimant creditor protection. If the claimant received the lump sum settlement personally the money is exposed and could be seized by creditors. If the claimant has accumulated personal debt during the legal procedings a structured settlement provides protection to the claimant. The last thing a claimant needs is additional stress and worry of having their settlement seized by creditors. 

Convenience

The annuity income payment stream can be paid directly to your bank account by direct deposit.

Which insurance companies offers structured settlements?

There are a number of insurance companies that offer structured settlements. Some are more competitive than others depending on age and other factors.

Standard Life is our first choice. The other insurance companies are Canada Life, Manulife, Sun Life and BMO Financial Group.

Other Considerations:

Settling personal injury claims can take years. If the lawyer requires a quote to determine the value of the settlement to buy the annuity, the lawyer should be aware that the quotes are time sensitive. Annuity rates fluctuate with interest rates just like any fixed income investment. The longer the duration the higher the volatility. The lawyer should tread with caution when requesting illustrations for a settlement conference to determine the amount required to settle a claim. The actual amount required to purchase the annuity is only known at the time of the actual settlement.

The other important consideration is actuarial assumptions can change, the trend is people are living longer. As actuaries adjust their mortality tables to account for longer longevity more money is required to purchase an annuity. The CPP tables are often used to determine mortality, this may not always be accurate some insurance companies use their own internal mortality tables.

One of the firms we refer clients to specializes in litigation of insolvent pension plans. In most cases the parties that are found negligent are both the actuaries and the money managers. Actuaries are often found liable for underestimating mortality, which determines how long payments at retirement have to be paid for. Currently it is estimated that 80% of all pension plans in Canada are underfunded. The same analogy can be applied for structured settlements. Except with a structured settlement it is final, there is no one to sue after the settlement has been accepted and the claim settled. The settlement amount required for an annuity will be different in ten years from the date of the settlement than it is at the time of the settlement. The trend is it will most likely be substantially higher due to increases in mortality. The lawyer acting on behalf of the claimant needs to take this into account to obtain the maximum amount of damages possible.

If you require legal advice please contact Lawrence (Larry) Swartz JD, CLU, CFP, CH.F.C., TEP, CFA directly by email at: swartz.lawrence@gmail.com

Articles and News by Lawrence (Larry) Swartz JD, CLU, CFP, CH.F.C., TEP, CFA

Bracing for the Pension Time Bomb - By Jim Middlemiss - March 2013

Advocis.ca - Tips and Traps in Pension Planning

Benefits Canada - Which Pension model is Best DB or DC? - By Steve Lamb - June 2011

The Progressive Economics - Defined Benefit and Defined Contribution: More Voices - By Jim Stanford - June 2011

Case Law G.E. Canada Equipement Financing G.P. and Northern Sawmills Inc. Court File No.10-CV-9042CL 

ECONOMIC & STATISTICAL CALCULATORS AND RESOURCES

Structured settlements are complex arrangements that require specialized services of an annuity broker with experience in this field. Stone-Hedge Financial Group Inc. has expertise in dealing with the Canadian insurance industry, legal and tax system.

When deciding which type of annuity is best suited for you Stone-Hedge Financial Group Inc. will guide you through this process.

Stone-Hedge Financial Group Inc. will provide quotes from some of Canada’s most competitive insurance companies.

 


The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.







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