Structured settlements use two approaches to determine annuity payments. Which statement correctly identifies which approach is more suitable?

• A. Top-down approach
• B. Bottom-up approach
• C. Both approaches are equally suitable
• D. Neither approach is suitable

Answer: (B)

When structuring annuity payments, the approach that builds the plan from the individual payments up to the total is the one that fits best. This bottom-up method starts with the actual payment schedule the claimant needs—the amounts, timing, and any adjustments for things like inflation or cost-of-living features—and then determines the funding and pricing needed to support that stream. It directly ties the payment pattern to the time value of money, mortality or survival assumptions, and investment returns that will back the annuity. By designing the payments first, you ensure the required schedule is financially feasible given the chosen discount rate and actuarial assumptions, and you can verify that the present value of all the payments matches the lump-sum settlement amount.

Starting from the top—the lump sum and attempting to allocate it into a payment schedule—can be problematic. If you fix the total first without anchoring to a concrete payment stream, you risk ending up with a schedule that is not financially sustainable under realistic investment returns, mortality, or any inflation adjustments. The bottom-up approach avoids that pitfall by ensuring each payment is supported by the funding and assumptions used to price the stream.

So, the bottom-up method is the better fit for determining structured settlement annuity payments.