Last month, Pacific Life launched its long-awaited Structured Settlement Index Linked Annuity Payment Adjustment Rider. This exciting new rider is available for all structured settlement cases. Pacific Life’s new index-linked rider finally addresses the industry’s demand for higher rates of return.
Structured settlement annuities are, at the core, a blend of single premium immediate annuities (SPIAs) and single premium deferred annuities (SPDAs); and due to the specific annuitant population, they are priced differently and governed by different tax codes than other traditional annuity products. Since the annuitant population includes injured claimants involved in lawsuits, the product goal is security and guaranteed payments and as a result the yields are lower than products that may incur more risk, like mutual funds.
So what are index-linked annuities and why does this matter to the structured settlement industry? Personal financial guru, Suze Orman, says, “The index annuity tracks an index such as the Standard and Poor’s 500 index, and your return on your money will usually be a percentage of what that particular index did for your corresponding investment year….Within this particular index annuity, for example, your money can only go up; it cannot go down…. It is set in reserve to protect you from the downside. Consider, too, one last safety feature. If you invest in an index annuity and the market goes down every single year, it still won’t matter to you.”
The Pacific Life product, while not a consumer- based index-linked annuity, adds an optional rider to the structured settlement to link the annuity payment(s) to the S&P500 Index, which in turn, allows for greater growth potential with the structured settlement, without downside risk exposure. It is supported by an IRS Private Letter Ruling.
How It Works This is an optional rider that can be added to either a particular benefit stream in the structured settlement plan or to all benefit streams. The claimant can choose the annual maximum increase level (similar to a cost of living adjustment) up to 5 percent.
When the S&P 500 index rises over a period of 12 months, annuity payments will also rise, subject to the annual maximum of 5 percent.
If the S&P 500 index has a negative or zero return, there is no reduction in the payment amount compared to the prior year’s payment(s).
An Example Let’s say Jane added the optional rider when her annuity was purchased. The initial structured settlement monthly annuity payment was $1,300 for the first year. In this example, the hypothetical S&P 500 index return for the first year was 4 percent. Therefore, her monthly annuity payment increased by 4 percent to $1,352. The second year, the hypothetical S&P 500 index return dropped 3 percent. Jane’s payments were not negatively affected – they maintained the prior year’s payment of $1,352. The following year, the hypothetical S&P 500 index return increased by 3 percent and in the fourth year it increased by 10 percent. Because of the 5 percent cap, in the final year, Jane would receive a 5 percent increase to her monthly annuity payment.