The Finn Blog

Pension vs. Lump Sum

September 22, 2020 – Two related AARP Bulletin articles may have bearing on your retirement plans. In short, companies are temping retirees with offers to pay their retirement benefits as a single, commuted lump sum instead of honoring their monthly pension obligations.

If you or anyone you know works for an organization that even offers a pension anymore, it’s worth your time to thumb through two recent articles:  “Treasury Department OKs More Lump-Sum Pension Payments” and “Pension or Lump Sum?”

A few highlights from these articles:

According to a MetLife study, 20% of those who opted for the lump sum spent the entire sum within five and a half years.

Of those who weren’t broke by then, 35 percent worried they would run out of money.

Most economists warn that people can rarely, if ever, replicate the security of a pension.

Less ethical financial advisors may be biased against the pension since they can benefit from investing your money.

Lump sum buyouts tend to benefit the company offering them more than the individual receiving them.

(NOTE: The articles don’t even mention taxes which would also be a consideration)

COVID-19 likely hasn’t left its final impression on our economy yet. As such, businesses with pension obligations may find themselves forced to accelerate layoffs, early retirements, or staff reductions to remain financially viable. Wise retirees-to-be will want to be prepared.

Compare Before Deciding

There may be many non-financial reasons for choosing a lump sum over the pension payments, but if you are confronted with the choice, how do you determine whether the pension or lump sum buyout is the better deal?

After reflecting on the information contained in these articles, a sensible move is to ANALYZE VALUES by comparing if the pension payments you’re forfeiting can be replicated in the marketplace with the lump sum you’re being offered.

We can help you estimate the fair market value of your pension.

Call us before you commit.

No cost. No obligation.

For Example:

A 60-year-old female in Pennsylvania is offered early retirement by her company. Her employment contract requires the company to pay her a monthly retirement benefit of $1,000 for as long as she and/or her 60-year-old spouse live. (NOTE: Assumes an opposite sex couple in this example. Although different actuarial tables would be applied in most states when calculating values for same sex spouses, the same analysis is used).

Before completing her retirement paperwork, the company tells her she has the option of taking her retirement in a single lump sum instead of the monthly income and they offer her $225,000.00.

Is this a good deal?

Could they replace $1,000 a month for $225,000?

A quick survey of life companies rated A+ or better by A.M. Best reveals it would cost approximately $275,000 to replace the pension this couple would be giving up. As such, the short answer to this question is, no, the employer is not offering them market value for the pension.

On the other hand, let’s assume the company offered her $325,000 for the same $1,000 per month lifetime benefits. In that instance, these folks would be better off taking the lump sum because they could buy a traditional annuity that would pay lifetime income which EXCEEDS $1,000 per month for lump sum offered.

A decision on whether to accept a lump sum payout in exchange for your future pension benefits should not be based on pricing alone. But people always like knowing if they’re being treated fairly so assessing value is a good starting point. You might be surprised.

I have no problem confessing our firm’s bias: Generally speaking, sticking with the pension will be the better choice. We’re big fans of secure income you can never outlive. That said, these articles provide solid practical tips for deciding what your best option will be. Everyone’s situation is different.

Whatever you do, don’t end up with an empty nest egg. There may be valid reasons to choose the lump sum over the pension benefits. But our advice is to think long and hard before doing so.

Photo courtesy of Luke Brugger at Unsplash.com.

 

 

Coronavirus Auto Injury Data

May 8, 2020 – Remember that credit you received on your auto insurance bill last month due to the anticipated lower claims costs since fewer people would be on the road during the coronavirus pandemic shelter-in-place orders?

Don’t be surprised if that ends rather quickly.

According to a recent article in Digital Insurance, a periodical aimed at senior insurance executives, those assumptions may have been faulty. (“Data may imply coronavirus auto-premium reductions were premature.”)

While there are certainly fewer vehicles on the road, it turns out many are traveling faster and perhaps feeling overly secure and paying less attention because of the low traffic, leading to more speeding tickets being issued and a higher fatality rate when crashes occur.

This can be especially problematic where 18-wheelers are involved. Speed + Mass + Collision usually = Very Bad Outcome.

This tracks with some of the conversations I’ve had recently with claims personnel and plaintiff attorneys. Overall, it’s too soon to know how all this will play out but all signs point toward the possibility of lower claims counts with higher severity until traffic patterns return to normal.

Until then, a timely reminder to be extra vigilant when driving during this pandemic.

Photo by Michael Jin on Unsplash

Roubini has a bad feeling on this one, all right?

March 3, 2020 – Remember the line in Platoon when Sgt. O’Neill (John C. McGinley) expresses his concerns about a pending military conflict with Staff Sgt. Barnes (Tom Berenger)?

“Bob, I got a bad feeling on this one, all right? I mean, I got a bad feeling. I don’t think I’m gonna make it outta here! D’ya understand what I’m sayin’ to you?”

Sgt. Red O’Neill

While the prospects of seeing one’s entire life savings evaporate due to fallout from a global pandemic pale in comparison to the psychological trauma experienced by the brave men and women who experience the harsh realities of war, this line came to mind when I read yesterday’s MarketWatch article quoting economist Nouriel Roubini who sees bad things ahead for the market.

“I expect global equities to tank by 30% to 40% this year.”

Nouriel Roubini

Investors may want to heed Roubini’s advice given he was one of the few economists to correctly predict the 2008 financial crisis. To avoid financial catastrophe, Dr. Roubini is urging people to seek safety NOW.

And he’s not the only one doing so. About a year and a half ago, we published a blog citing other experts suggesting clients may also wish to pare down their exposure to stocks in favor of safer options.

Where Can You Find Safety?

In addition to buying safe bonds, structured settlements and retirement annuities remain some of the safest choices for those who require certainty.

Even with interest rates at or near historic lows, structured settlements and retirement annuities remain attractive alternatives. Something about making some money (especially when there’s a decided tax advantage) is more attractive than losing a lot of money.

Consider all these available options clients are currently talking to us about:

Tax-free structured settlements for physical injuries.

Tax-deferred structured settlements for nonphysical injuries.

Tax-efficient structured installment sales to reduce or eliminate capital gains taxes when selling qualifying appreciated assets or businesses.

Fixed indexed annuities which allow participants to benefit from market ups but shield them from market downs.

Market indexed structured settlement options with downside protection.

A structured settlement option that accounts for future interest rate increases.

Multi-Year Guaranteed Annuities (MYGAs) for “better than CD” rates.

Even if you still have faith in the market for the long-term, almost everyone would be wise to consider converting at least some of their safety net to something that is actually safe.

And if Dr. Roubini ends up being right, there’s no time like the present to make a move before things get really bad.

Let us know if we can help save you from drowning.

Structured Settlements: Structured Installment Sales

Eleventh in a series of blog posts dedicated to helping clients decide when a structured settlement should be considered.

Today’s Installment (npi): Structured Installment Sales

February 5, 2020 – For this segment in our series of educational offerings, we’re going off-topic slightly because we wish to present a structured settlement offshoot product designed to help clients defer and sometimes eliminate capital gains taxes when selling qualifying appreciated assets: Structured Installment Sales.

Be sure to visit our companion site: MyStructuredSale.com

Real estate investors, business owners, property owners, and the realtors, business brokers, lawyers and accountants who represent and advise them will find this simple-to-implement alternative to traditional sales worthy of their time.

As any accounting major can tell you, deferring taxes and accelerating deductions is one of the fundamental tenets of accounting.

Structured installment sales help conveniently with the deferring taxes part of that formula.

The process is simple:

Step 1: Buyer and seller negotiate a price for the property or business.

Step 2: Seller decides how much of the net settlement proceeds to defer.

Step 3: Seller contacts a firm specializing in structured installment sales annuity quotes. (We hear Finn Financial Group is pretty good!)

Step 4: Terms of the structured installment sale are incorporated into the sales agreement and closing documents.

Step 5: At closing, all relevant documents are executed, and the funds dispensed to the appropriate parties.

Although Treasury regulations have permitted installment reporting for taxes since 1918, it wasn’t until 1980, when Congress passed Public Law 96-471, that Section 453 of the Internal Revenue Code was modified laying the foundation for what would become known as Structured Installment Sales. Publication 537 contains information on installment sale eligibility requirements.

In 2005, Allstate Life, in an effort to explore expanded applications for structured settlements, researched a utilization in the appreciated asset world and rolled out a product they called a structured sale. Prudential soon followed but just as the concept was beginning to gather major traction, the Great Recession hit wiping out investment equity and the opportunity to defer taxes with it.

Now, with property values up over the past decade, this tax deferring option is poised for a major resurgence. So much so that one of the largest insurers in the world, MetLife, has chosen to offer Structured Installment Sales through its specialized, appointed agency force.

Click [HERE] to watch MetLife’s 1:12 promotional video on the topic.

Structured installment sales are also available through Independent Life as well as an option funded by U.S. Treasuries.

When a structured installment sale is being considered, the parties involved need to be cognizant of a few basic rules:

A decision to defer sales proceeds must be made prior to finalizing any sales agreement to avoid constructive receipt;

Terms of the deferral should be incorporated into any sales agreement;

Plan design and deferral options may be limited;

Buyer and seller must execute certain required documents prepared by the firm implementing the structured installment sale;

The annuity must be funded directly by or on behalf of the buyer through the closing process.

The Tax Cuts and Jobs Act gives even added incentives for certain taxpayers to defer recognition of gain into future years. Those contemplating selling any qualifying appreciated asset would be well-advised to consider doing so via the structured installment sale method.

Unless they like paying taxes you can otherwise avoid.

World’s Largest Insurers

February 3, 2020 – Of the Top 25 largest insurers in the world in terms of (2108) non-banking assets, five of them are domiciled in the United States. (“Best’s Review,” February 2020, p. 27)

Those who resolve their personal injury claims and lawsuits with structured settlements can take comfort in knowing that all five of these well-capitalized American markets or their affiliates are active in the structured settlement marketplace. Their ranking and total assets in USD follow.

World’s Largest Insurers:

3 – Prudential Financial, Inc. – $815,078,000,000

5 – Berkshire Hathaway Inc. – $707,794,000,000

6- MetLife, Inc. – $687,538,000,000

17 – American International Group, Inc. – $491,984,000,000

25 – New York Life Insurance Company – $339,144,000,000

That’s a lot of financial security for those who are dependent upon future payments to meet ongoing healthcare and living needs.

Structured settlements were created to help accident survivors manage their lives with peace of mind that they’ll have the funds in the future when they’re needed.

With excellent companies like these and the handful of additional highly rated life markets providing safety and security reassurance, the industry is poised for many more successful years of making peoples’ lives better.

THANK YOU to our life company partners for their commitment to the structured settlements industry.

Recognizing a Noble Profession

This Week We’re Celebrating:

Claims Professionals Appreciation Week

January 27, 2020 – January 31, 2020

What’s that you say?  Didn’t know such a holiday existed?

Don’t feel too bad.  According to Google (and every other source I could think to consult), it doesn’t.

That’s why I invented it in 2013.

Full Disclosure I’m from a family of insurance professionals.  Add up the claims service of my dad, brother, wife, step-daughter, a couple family godparents and myself, we have dedicated more than 150 years to the insurance industry.

Even if Hallmark never designs a new card to honor the occasion and I’m the only one who ever celebrates it, I plan to set aside this week for the remainder of my career to pay homage to the fine men and women who toil in the claims departments of America each and every day of the year.

And I’m making it a week because it deserves to be more than a measly day given all they have to deal with throughout the year.  I know.  I’ve been there.

Why do this?  A couple of reasons:

They Make The World Go ‘Round

Take a moment to think about all the people, in addition to those for whom insurance coverage is provided, whose lives are enriched because of the work claims representatives perform:

  • Contractors who repair physical damage,
  • Doctors who treat those with physical injuries,
  • Attorneys who represent clients involved in the settlement process,
  • Shareholders, Mediators, Car Dealers, Manufacturers,
  • Consultants, and Vendors of every stripe imaginable.

It’s impossible to quantify exactly how much economic activity is generated simply because claims professionals do their job.  Suffice it to say that it’s probably . . . “a lot!

The Job Requires Skill In Multiple Disciplines

A claims professional is the quintessential “Jack of All Trades.”  At various times, they wear  multiple hats which can make it hard to differentiate them from numerous other professionals such as:

Banker – Counselor – Pastor – Lawyer – Appraiser – Mathematician – Researcher – Investigator – Mediator – Politician – Time Management Specialist – Physicist -Philosopher – Educator – Statistician – Communications Expert – Interpreter – Etc.

Claims departments frequently draw from a talent pool which contains people from a wide variety of interests and college majors which results in a broad background of experience.

In fact, many smart plaintiff law firms and other businesses often hire ex-claims professionals because they value their skills and training so highly.

It’s a Noble Profession That Helps People 

Claims professionals serve as the conduit between a suffered loss and recovery.

Unfortunately, money is the only medium available that can help restore an individual to their pre-accident condition following a covered loss.  And quantifying intangible damages is an impossible task at best.  Consider:

  • What value can you really ever put on the life of a child who’s been killed?
  • How can money replace the memories of a home destroyed by fire?

These are among the many challenges claims professionals confront each and every day.  And they do so in spite of the fact that they often garner about as much respect as an offensive right guard on a football team for their efforts.

Theirs is NOT an easy job by any stretch of the imagination.

But ask any person who’s ever been aided by a Catastrophe Duty Claims Professional how appreciative they were when the insurance representative showed up, check in hand, to help appraise and pay for their loss.

Ask anyone’s who has ever accepted a structured settlement when settling a physical injury claim how glad they were to receive guaranteed future income that is 100% income tax-free.

There are countless other examples of appreciation people feel each and every day for claims service even if it’s very rarely expressed as often as it should be.

So here’s to you, Claims Professionals.  This week we pause to salute you by saying simply

 “Thank You!”

for doing what you do.

We hope you are as proud of your contribution to society as we are of the the service you provide that helps so many.

Best wishes to all of you for continued success in your careers and your life!

Structured Settlements: Contractual Agreements

Tenth in a series of blog posts dedicated to helping clients decide when a structured settlement should be considered.

Today’s Installment: Contractual Agreements

January 16, 2020 – As the applications of the structured settlement concept continue to evolve, potential clients and practitioners should be aware of the less traditional, but equally valuable, opportunities to satisfy certain contractual agreements (or, more frequently, disagreements) by adapting the nonqualified assignment process we’ve discussed in previous posts.

Business disputes, mergers, acquisitions, divestitures, and a host of other situations may lend themselves to more favorable outcomes for all involved when a nonphysical injury structured settlement is considered.

Key to a successful outcome will be the ability to craft an agreement outlining that one party (the Payor) is obligated to pay future periodic payments to another party (the Payee) in order to satisfy a financial obligation.

Because the Payor will not usually want to remain contingently liable for any future financial commitment, the parties agree to permit the Payor to satisfy its obligation to pay future income by purchasing an annuity or U.S. Treasury-backed obligation and substituting obligors using an independent third party assignment company established for such a purpose.

Since the assignment companies accepting these obligations are not able to handle assignments involving wages, payees CANNOT receive structured settlement payments that are considered W-2 income. As such, all future payments will be processed as 1099 income and will be reported as such.

The Payor and Payee usually have divergent interests when it comes to the income being paid when finalizing contracts.

Paying a single lump sum to satisfy its end of the agreement will leave the Payor in a better position to move forward without any contingencies or encumbrances in dealing with the other party.

The Payee, on the other hand, will usually be better served by spreading the income and corresponding tax liability over a longer period of time.

Ergo, the nonqualified assignment process permits both sides to accomplish their objectives. The parties can settle for a single lump paid by the Payor which is used to purchase a more tax-efficient outcome for the Payee.

Business lawyers, business owners, executives, investors, and others who familiarize themselves with nonqualified assignment structured settlements can create more flexible contractual outcomes than is otherwise possible with the more common single lump-sum or short-term payout agreements.

Although the term has fallen out of vogue in recent years, nonphysical injury structured settlements present opportunities for win-win resolutions and should be explored anytime someone can benefit by receiving money over time.

Photo courtesy of Mari Helen on Unsplash

Structured Settlement Market Strength

September 11, 2019 – As volatile markets continue to spook some investors while inspiring others, we take pleasure in being able to constantly reassure our clients they make wise decisions and are in good company when they choose structured settlements and retirement income annuities.

Safe. Steady. Secure. Strong. That’s what we’re all about.

In addition, according to LIMRA Secure Retirement Institute, the guaranteed future income options we offer our clients are also quite popular!

Structured Settlements: Income Strong

With over 1,000 years of combined experience, the life markets offering structured settlements have unparalleled strength and staying power.

So how strong and popular are the structured settlement life markets we represent?

Four of them account for approximately 30% of the $93.6 BILLION worth of annuity purchases through the second quarter of 2019 and boast Top Ten rankings from the aforementioned LIMRA study referenced above.

AIG Companies – 1st ($10,221,715,000)

New York Life – 4th ($7,196,481,000)

Prudential – 7th ($5,367,321,000)

Pacific Life – 8th ($5,209,920,000)

That’s a high vote of confidence and speaks to the public’s appetite for safety, security and financial strength when it comes to preserving their money.

Congratulations to these excellent companies on their success. We are proud to represent you along with the other fine companies who comprise the structured settlement marketplace.

On a Somber Note: The infamy surrounding today’s date will never leave us.

It shouldn’t.

Even those of us without a direct personal connection to the tragic events of one of the worst horrors ever perpetrated on American soil felt its devastation and continue to live with its consequences.

Today, we honor those who died as a result of that unspeakable tragedy and offer thoughts of peace for their families.

Structured Settlements: Fire Losses

Ninth in a series of blog posts dedicated to helping clients decide when a structured settlement should be considered.

Today’s Installment: Fire Losses

August 27, 2019 – The vast majority of claims and lawsuits requiring structured settlements involve some form of personal, physical injury.

Structured settlements can come in handy when resolving a wide variety of non-injury claims, however, and fire damage losses represent one such category of claims.

Sometimes fire damage is limited to a single residence or building and a homeowners policy is sufficient to fully compensate the owner.

Other times, wildfires cover tens of thousands of acres, claim the lives and property of large numbers of people and cause billions of dollars’ worth of damage.

Not surprisingly, lawsuits for negligence are often alleged when major fire losses occur and, because of the often-wide disparity between damage and available coverage, understanding the tax complexities stemming from these losses and how best to approach resolution become chief considerations.

Are Taxes Owed on Fire Loss Claims?

One of our firm’s favorite tax resources is anything published by Robert W. Wood, a nationally recognized tax attorney specializing in matters of taxation as they pertain to physical and non-physical injury settlements and verdicts.

An excerpt from his popular Tax Alert series recently teed up this topic for us in “How IRS Taxes Fire Victims.”

An oversimplified version of the tax treatment applied to fire losses can be gleaned by examining a fundamental tenet of tax liability, to wit: to the extent recovery from a loss does not exceed the pre-fire value of the property, any money recovered via a settlement or verdict should be a non-taxable event.

But as Rob’s summary makes clear, it’s best not to assume since different rules apply to different situations and there can be much to consider.

Punitive damages might also be awarded in some fire damage lawsuits if a jury finds sufficient evidence to determine the defendant’s conduct warranted them. In such instances, a verdict could easily push the recovery well above the replacement cost of the property and create even more tax challenges for the property owner.

Non-qualified Assignments

Structured settlements for non-physical injury claims such as fire losses are usually accomplished using a non-qualified assignment process which permits the settling defendant to close its file when the claim is concluded while permitting the plaintiff to defer recognition of portions of the settlement into future years.

Deferring income and any accompanying taxes into future years is a recognized strategy as old as the tax code itself. Structuring fire losses can create tax efficiency for the plaintiff and frequently permits polarized parties to resolve differences when negotiation stalemates occur.

Last year’s Camp Fire in Northern California was one of the deadliest wildfires ever recorded. Pacific Gas & Electric (PG&E) is at the center of liability theories for losses stemming from this destructive wildfire. The law firm of Walkup, Melodia, Kelly & Schoenberger is one of several firms representing impacted individuals and families of the Camp Fire and provides regular updates on the litigation.

It’s worth mentioning that many fire losses will also involve a component of personal, physical injury. In addition to loss of life, many individuals who survive fires suffer burns and respiratory damage as a result of smoke inhalation. Fire losses causing such personal, physical injuries would qualify as tax-free damages under 26 U.S.C. § 104(a)(2).

It’s not unreasonable to expect some fire losses might result in a combination of tax-free and taxable damages being paid when the claim or lawsuit is resolved. In those instances, qualified tax advice should always be at the forefront of one’s resolution strategy.

Structured Settlements: Medicare Secondary Payer Act

Eighth in a series of blog posts dedicated to helping clients decide when a structured settlement should be considered.

Today’s Installment: Medicare Secondary Payer Act

August 13, 2019 – If there’s one area of claims resolution where structured settlements attain near universal acceptance, it’s when they are used in conjunction with settling a claim impacted by the Medicare Secondary Payer Act (MSP).

In 1980, when Congress passed the Medicare Secondary Payer Act, U.S.C. § 1395y(b), the goal was a simple and noble one: Protect the Medicare trust fund by prohibiting payment for medical services which have “been made or can reasonably be expected to be made” by a primary payer.

For about 20 years, few gave much thought to the reality that workers’ compensation and liability claims were being settled every day without even considering Medicare’s interests, creating de facto lawbreakers since many settlements involved such payments.

Even when liens for past medical costs absorbed by Medicare began to be taken seriously, future care stemming from the compensable injury and upon which the settlement value was determined, was ignored resulting in many injured workers or plaintiffs “double dipping.”

Medicare Set-Asides

To avoid shifting responsibility for future injury-related care to the secondary payer, Medicare, a cottage industry emerged offering a solution: Medicare Set-Aside (MSA) arrangements.

Companies specializing in evaluating an individual’s future accident-related medical care review the case to recommend an allocation which should be attributed to protecting Medicare’s interests. The settling parties, then, should “set aside” these funds from any settlement to ensure all are meeting their compliance requirements under the law.

Commonplace in most workers’ compensation claims, the usage of MSAs in liability settlements has grown in recent years.

Sometimes the parties opt to secure approval from the Centers for Medicare & Medicaid Services (CMS) before concluding their settlements while some companies will guarantee their evaluations and agree to hold the parties harmless if CMS refuses to honor their evaluation.

Structured Settlements Save Money

When MSAs are procured, the settling parties can choose to satisfy their MSP obligation by paying the recommended single lump sum or by providing two years’ worth of “seed money” followed by a series of annual payments for a specified period of time.

While the single lump sum option is typically the better choice on smaller (under $25,000) MSAs, substantial savings can be realized by opting for the annuitized option as the MSA increases in value.

Quantifiable savings: On the last dozen cases our firm has quoted, we’ve been able to demonstrate an average 20.37% savings on the cost of funding the MSA.

Whether the savings realized by structuring an MSA is used to reduce the overall cost of the settlement or to increase the net, non-MSA recovery to the plaintiff/claimant, there’s no denying the value of this excellent claims resolution tool.

And as MSAs become increasingly prevalent, expect claim settlement cost efficiency and fairness to strengthen.

For further reading: “A Good Fit”

Finn Financial Group