If you receive a personal injury structured settlement, then you need to be aware of the possible scenarios that could occur regarding your annuity in the event of your death.
After all, structured settlement payments are extremely valuable and it’s only natural that you would want your surviving family members to enjoy the financial security they provide.
What happens to your policy will depend on the legalities of your structured settlement, but usually one of four things could happen:
Sometimes, structured settlement annuities end altogether upon the death of the policy holder.
This scenario is of course, the best possible outcome for the insurance company responsible for paying the regular installments.
This outcome is negotiated at the time the structured settlement is created, and may be acceptable if the claimant is in good health and relatively young.
However, if the claimant is older or has a shortened life expectancy as a result of the injuries they have suffered, this type of agreement should be avoided.
Fixed payments continue according to schedule
Oftentimes, a personal injury structured settlement is agreed according to a fixed or minimum number of payouts.
Such a settlement is called a “guarantee period” or “period certain” annuity. If the policy holder dies before the fixed number of payouts has expired, then the annuity would then be passed over to his or her next of kin.
This is the most common type of policy as it is most easily agreed upon by both parties.
One other advantage of a structured settlement with fixed payments is that it’s easy to keep track of the remaining value of an annuity in the event that the policy holder would like to sell.
A discounted lump sum is paid
Sometimes, a cash structured settlement policy will have a clause known as a “commutation rider” whereby, should the policy holder die, a discounted lump sum will be paid out to the policy holder’s beneficiaries instead of the payments continuing.
Commutation riders need to be agreed upon at the time the structured settlement is created. One advantage of inserting this clause into an annuity agreement is that the policy holder will receive favorable tax incentives for doing so.
Usually, this is the best option when beneficiaries are unlikely to gain much benefit from receiving periodic payments as opposed to a lump sum.
Note that the discounted lump sum is usually far more than what could be obtained by trying to sell the personal injury structured settlement to a company or investor that buys them for profit.
In most cases, the lump sum payout upon the recipient’s death will amount to 90% to 95% of the total remaining value of the structured settlement.
Payments continue as normal
The last eventuality is that payments continue as normal, if the policy contains a “joint and survivor” stipulation in the contract.
This kind of clause is inserted into lifetime structured settlements, and it means that the policy is more or less shared between the original claimant and his named beneficiary (usually a spouse, or sometimes a child).
Should the policy holder die, payments will continue to be paid to the beneficiary for the rest of his or her life.