Guaranteeing the Uncertain: Reversions and the ROI on a Structured Annuity
The concept of reversions is a topic that surfaces frequently in our structured settlement department. These clauses can seem confusing, sometimes made more complicated by uncertain futures; however, they are actually straightforward with tangible benefits associated with them. There are two primary questions we hear the most when clients are asking how they can recover funds from a structured settlement:
- Can the money already deposited in the Medicare Set-Aside (MSA) account be returned to the carrier upon the claimant’s death?
- Can the money that has not yet been deposited to the MSA account (i.e. the unpaid annuity stream) be returned to the carrier upon the claimant’s death?
The answer to both of these questions is yes, if addressed and agreed upon by the parties at the time of settlement.
The first question pertains to the situation where the annuity has been making deposits to the claimant’s MSA account for a period of time resulting in an unused balance at the time of the claimant’s death. Since the balance in an MSA account is typically the property of the claimant’s estate, the best way to accomplish recouping these funds is to set up professional custodial administration of the account up front. With professional administration there is a custodial agreement outlining the terms of the arrangement, and the account may be established with the carrier listed as the beneficiary upon the claimant’s death. Once all final bills have been paid and a final reporting to CMS is completed, the remaining funds may be returned to the carrier. Professional administration also provides the added security of knowing the funds in the MSA account are spent appropriately, and limited to medical treatment related to the industrial injury. There is an added cost for custodial fees, which are generally paid by the carrier upon establishing the account. However, this is a cost mitigating option to consider, especially when specific treatment has been added to the MSA through the CMS review process but is unlikely to be pursued by the claimant (i.e. a surgery that the claimant has declined, medications which are no longer in use, etc.).
The second question addresses the remaining annuity payments that have not yet been deposited into the MSA account at the time of the claimant’s death. The short answer is yes, these unpaid funds can be returned to the carrier, but only if certain steps are taken at the time the annuity is set up.
The most common and cost effective method to fund an MSA is with a temporary life annuity, however, this type of annuity does not (and cannot) have a reversion attached. To clarify, with a temporary life annuity benefits are paid to the claimant (or custodian) annually for a particular period of time, only if the claimant is living. If a claim is settled with a temporary life annuity and the claimant immediately dies, nothing is paid out of the annuity and the life company keeps the money. In this situation, nothing is returned to the carrier. This may sound like a bad deal for the carrier who funded the annuity, but in practice this scenario rarely occurs. It is important to note that the cost of a temporary life annuity reflects the assumed risk – meaning the life company factors in the life expectancy of the individual in the cost. Much more often than not, the price the carrier pays will end up being far less than the benefits the life company provides, even if the claimant has a shorter life expectancy than what was projected.
Now, back to the question: in order to have a reversion attached to an annuity and receive additional assurances of value the annuity must contain a guaranteed period. This is more expensive than the temporary life annuity because the risk factor is removed, and the life company knows exactly how many years they will be paying out – regardless of when the claimant passes away.
A carrier may want to consider the size of the settlement when contemplating a reversion. As we discussed, temporary life annuities are cost effective and a solid choice for smaller settlements; however, consider the possibility of having funded a $400,000 check that produces only $75,000 of benefit, if the claimant passes away much earlier than anticipated. If a reversion had been in place, then the carrier would be set to recoup a portion of total premium paid out. For this reason, on a larger sized annuity, a reversion makes a lot of sense.
There are a number of different options for setting up a reversion, and usually, the most cost effective method is to utilize a commutation rider. This rider may be attached to any guaranteed benefit annuity, and if the claimant passes away prior to the last guaranteed payment being made, the life company essentially returns the cost of providing these unpaid guaranteed benefits to the carrier. The actual calculation is more complicated and varies by life company, but the basic concept is the same — the carrier would receive a partial refund of the premium paid at the time of settlement in relation to the cost of the remaining unpaid benefits (generally 90-95% of the cost at the time of death). The other benefit of the commutation rider, as opposed to the other annuity reversion avenues, is that it offers the chance of partial recovery for the entire duration of the guaranteed period.
Structured annuities are not the complicated and foreboding settlement vehicles that they are sometimes perceived to be. In fact, with MSAs, not structuring the funds can result in problems for the claimant who is unable to manage their money appropriately, and for the carrier who misses out on a reversionary clause that could have recouped thousands in the future. There are many methods available to guarantee the uncertain and achieve a reasonable return on investment (ROI) while doing so. If you are considering a structured settlement and/or custodial account administration, either of which have potential for applying a reversionary interest, our experts can walk you through the process and explain all of your options. Please feel free to reach out to us at StructureTeam@medval.com.