The Internal Revenue Service (IRS) on August 29, 2014 issued a Private Letter Ruling (PLR-143928-13) approving a Pacific Life Structured Settlement annuity with an annual payment adjustment based on the S&P 500 Index’s performance. In addition, the claimant can request an immediate present value lump sum commutation payout of their annuity by submitting a Notice of Hardship Conversion request to the Life Company’s Assignee who will review and consider it on a case by case basis.
Pacific Life launched the Index-Linked Annuity Payment Adjustment Rider and has published a brochure that helps educate attorneys and their clients on the program and its benefits. . It has hypothetical examples showing how the payments of one’s annuity can increase annually based on a positive S&P 500 index returns with a 5% cap and the annual payment cannot decrease if the S&P 500 Index return decreases or remains flat.
I am very excited that the IRS has welcomed an innovative product into the structured settlement marketplace. Many attorneys and their clients have shown concerns with the low interest rate environment and traditional structured annuities. Now an injured party can choose a settlement planning option that is linked to the S&P 500 Index performance. The S&P 500 Index is a great sample of common stocks traded on the New York Stock Exchange, American Stock Exchange and NASDAQ and has increased an average of 9.8 % per year during the past 30 years. In those 30 years, only 12 years has the S&P increased less than 5% or decreased.
The claimant has protection on the downside of the market as annual payments cannot be reduced but can see their annual payment increase up to 5% if the market catches the wind in the sails. The one concern I have is that the product is similar to using a Cost of Living Adjustment (COLA) on a traditional structure annuity where we have payments increase annually at 3% or 4%. In Pacific Life’s new product and those traditional COLA annuities, the claimant must be willing to accept that their initial starting payments will be lower. If a claimant needs a specific number to live on for income or to meet a specific need then a traditional structured settlement annuity will provide a fixed tax free set payment right off the bat and through the life of the annuity. So we need to determine right situations in our needs analysis where this new product makes most sense.
What is most hopeful about this announcement is that the IRS seems willing to approve innovative structured settlement concepts for settlement planning. We can only hope that we will see more options for injured parties and contingency fee attorneys for structuring their attorney fees.