The Settlement Alliance

Can Structured Settlement Payments Be Tied to S&P Performance?

Can Structured Settlement Payments Be Tied to S&P Performance?

Jun 8, 2017

Structured settlement annuities are considered a safe, practical approach to preserving proceeds from personal injury, wrongful death, and workers’ compensation settlements. By placing all or a portion of the settlement proceeds in a structured annuity, a claimant can enjoy a source of guaranteed1 long-term income. As the structured settlement industry continues to evolve, providers are working to innovate new products to benefit injured claimants and their families. One such product is Pacific Life’s Index-Linked Annuity Payment Adjustment (ILAPA) Rider.

ILAPA vs. COLA: What’s the Difference?

In the past, the only way to create payment increases within a structured settlement plan was to include a cost-of-living adjustment (COLA) rider. Pacific Life designed a different approach to payment increases by creating the ILAPA product. Much like the COLA rider, ILAPA is also a rider that can be added to a structured settlement plan. The key difference between a COLA rider and an ILAPA rider is the size of the potential payment increases. COLA payment increases are fixed and are generally set at 2-3%. ILAPA increases can vary, up to a maximum of 5%.

How Does the ILAPA Rider for Structured Settlements Work?

The ILAPA product is directly tied to the performance of the S&P 500 index. Using an “index measurement period” of 12 months commencing when the annuity payments begin, Pacific Life determines whether the S&P has risen, decreased or remained flat. If the S&P has risen, the annuity payment will be increased at the same percentage, up to 5%. If the S&P declines or remains flat, there will be no impact on the annuity payments. Instead, they will remain as is for the next 12 months.

Example: ILAPA at Work

Using the example of a Pacific Life structured settlement annuity initially scheduled to provide payments of $2000 per month, here’s how the ILAPA rider could hypothetically affect the payments:

END OF

YEAR 1

YEAR 2

YEAR 3

YEAR 4

S&P 500 Index Return (hypothetical)

3%

-3%

9%

4%

Payment adjustment (5% cap)

3% (increase of $60)

0% (no increase or decrease)

5% (increase of $103)

4% (increase of $86.52)

Monthly Payment

$2060.00

$2060.00

$2163.00

$2249.52

In the example above, when the S&P declined in year 2, it had no impact on the monthly structured settlement payments. However, when the S&P showed positive performance in years 1, 3, and 4, the monthly payments increased accordingly (up to the cap of 5%). By the end of year 4, the monthly payments had increased $249.52 over the original $2000/month payments. Over the course of year 5, that means almost an extra $3000 of tax-free income (see PLR 143928-13 for the IRS’ ruling on the ILAPA product in regards to tax treatment2).

Contact Our Structured Settlement Experts for More Information

While the ILAPA rider may not be right for every claimant, it serves as another tool to be considered as a part of a comprehensive settlement plan. For more information, contact our structured settlement experts at 800-464-2500 or info@settlement-alliance.com

1 Guarantees are subject to the claims-paying abilities of the issuing insurance company.

2 The Settlement Alliance does not provide legal or tax advice.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • Liberty Life Assurance Company of Boston
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential