Imagine being injured in an accident and having to pay for years of medical care with a lump-sum financial settlement. Faced with market uncertainties, even a professional money manager could find it challenging to fund long-term care and therapy with an all-cash settlement.
That’s why every year, tens of thousands of injury victims settle legal claims with a structured settlement. This involves trading a cash settlement for long-term, tax-free income funded by an annuity. It’s a smart choice and encouraged by the federal tax code.
But now imagine that the financial planner helping you procure that annuity pushes you to accept a specific life insurer’s product — while never disclosing that this helps him qualify for a glamorous overseas junket offered by that same insurer.
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Insurance incentives, unfortunately, are a problem in the structured settlement industry. It’s a situation that — in my opinion as a former deputy district attorney specializing in consumer fraud — requires attention from Congress and state insurance regulators. But it also requires consumers considering a structured settlement to protect themselves.
Understanding structured settlements and structure planners
With a structured settlement, accident survivors receive a payment stream stretched over decades or even guaranteed for life. Payments are funded by a life insurance annuity, and income is free from federal and state taxes.
In addition to the tax benefits, structured settlements offer long-term security, which is something that cash alone can’t do. Having represented injury victims for decades, I have seen how plaintiffs often prefer to take as much settlement cash as possible. This is generally the worst option, because in a few years that money is gone, and accident victims often end up on public assistance.
In almost every case when there is a payout after an accident, a plaintiff will work with a structured settlement planner. Sometimes the defense brings in the planner, but in medium to large cases, it is imperative that victims have their own planner.
Settlement planners have a crucial role in quantifying long-term costs of therapy, medical care, prescription drugs, medical device replacement and other injury-related needs. This is highly complex, so a good structured settlement consultant can be a huge benefit.
That planner also reaches out to insurers to price the annuity needed to fund these payments. There are about 10 major life insurers issuing structured annuities, and last year they issued a combined $5.5 billion in structured settlements. The average award was more than $230,000 in 2016.
Huge ethical problems
Most structured settlement planners are professionals who are well-compensated. But when insurance companies begin offering international trips, fancy golf events and other pricey rewards for planners steering injured clients to that insurer’s annuities, you get huge ethical problems.
For example, on Oct. 19, Pacific Life opens a six-day incentive trip for structured settlement planners at the Four Seasons in the Maldives. A structured settlement planner forwarded the invitation to me.
Pacific Life bills this as an “educational setting.” Since the Four Seasons advertises white sand beaches and turquoise waters, I suspect that attendees reap personal benefits beyond the educational opportunities.
The company is also funding a second structured settlement incentive trip to the Four Seasons in Dubai.
Incentive trips like these raise a disturbing possibility: Will settlement planners push injury victims to accept certain insurers’ annuities even if there are better or less-expensive options?
And how can victims or their lawyers be certain that planners’ actions aren’t influenced by a desire for a fancy reward?
Trips offered and sales surge
The evidence appears to show that these trips affect what structured settlement planners promote to accident victims. According to LIMRA data, Pacific Life’s structured annuity sales dropped nearly 10% between 2013 and 2014, when the company did not offer incentive trips.
But in 2015, it announced a six-day trip to the Four Seasons in Bora Bora, and sales surged. Since then, the company’s structured annuity sales have gone from $770 million to nearly $1.2 billion, even as the overall structured annuity market was nearly flat.
I reached out to Pacific Life, but the company declined comment.
Lawyers are fiduciaries, and we protect our clients’ best interests. Structured settlement planners aren’t held to that same standard, although most planners I know do act ethically. But evidence suggests some may not. If I knew that a planner’s advice to my client was connected to an incentive trip, I would never use that broker again.
The structured settlement industry’s trade association has a Code of Ethics, which states that its members “must exercise the utmost integrity when providing professional structured settlement services.” It further states that services “must be dictated by professionalism, honesty and candor which should not be compromised for personal gain or advantage.” (emphasis mine)
The association’s executive director, Eric Vaughn, told me that this code of ethics was not meant to establish a fiduciary standard. When I asked if settlement planners are ethically bound to disclose that a client’s annuity choice may earn the planner an incentive reward, he replied that planners are offered many incentives and that the collective impact was not significant.
Interestingly, the trade association’s president also heads Pacific Life’s structured settlement division.
How consumers can protect themselves
To be clear, structured settlements are an excellent option for injury victims, and most planners are competent, ethical professionals. But an accident settlement involves critically important financial decisions. So, prudence requires that you protect yourself from planners who hide conflicts.
- First, have your broker confirm in writing if your acceptance of a structured annuity qualifies him or her, directly or indirectly, in an insurer incentive program.
- Second, you should also ask whether the planner’s company has a policy on acceptance of incentives. Three years ago, a respected industry blogger wrote about an all-expenses paid structured settlement incentive trip to South Africa. A planner on this trip subsequently emailed colleagues suggesting that their decisions on where to place annuities should be influenced by this trip.
- Third, planners should provide annuity quotations from multiple insurers in writing. Life insurers or defense attorneys should confirm the accuracy in writing.
- Fourth, if the defense objects, insist on a plaintiff broker! Structured settlement brokers are paid by commission. When you bring in your own consultant, he or she splits the commission with the defense. So, there is benefit to you but no extra cost.
Conclusion
Many planners say that competitive underwriting, not incentive programs, is the best indicator of insurers’ success with structured annuities. But even if true, a planner should still disclose anything that qualifies him for an incentive reward.
I would not be surprised to see litigation result from these incentives, especially directed toward settlement planners. In my legal opinion, thousands of accident victims could argue they were victims of a monumental consumer fraud and conflict of interest.
Because that’s what it smells of. And even if simply by appearance, the harm done to structured settlements is significant.
Members of the structured settlement industry, particularly insurance executives, refused to speak with me about their programs. If Sens. Elizabeth Warren, Charles Grassley or other members of Congress who support structured settlements read this, I hope they have better luck.
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