We frequently hear from investment people about the rate of return on structured settlement annuities vs. other investment products. It is important to keep in mind that these payments, by Federal Statute, are totally tax-free from any Federal, State, City, Social Security or Medicare taxation.
The income generated by investment of a large settlement would typically result in higher tax brackets. Therefore, one would need to earn 35 to 40% greater rates each and every year throughout a lifetime to equal the same rate of return as the structured settlement on a net after-tax basis. Please also keep in mind there are no ongoing fees, commissions, reporting requirements or additional expenses in connection with these structured settlements.
When comparing rates of return of a structured settlement annuity vs. another investment, it is important to compare those returns over a period of time comparable with the life expectancy of the individual claimant. It is also important to compare the net performance of the investment after fees and taxes as there are no ongoing fees, commissions, or additional expenses in connection with the structured settlement annuity.
If the claimant has sustained serious injuries, "age rated" annuities often produce a higher tax equivalent internal rate of return guaranteed for a lifetime, with almost no risk.
At a minimum we suggest the claimant consider a portion of their portfolio that would normally be invested in conservative products such as U.S. Treasuries, Municipal Bonds, Corporate Bonds, etc. (typically one-third to one-half of the settlement) be placed in a "structure" as this will improve the rate of return on these monies due to the tax-free status.
Many financial planners do not understand structured settlements and many have never experienced a Bear Market. Could the claimant stand to lose almost 50% of their settlement over a 3 year period if the market declines as it did in the early 1970's and again in the early 2000's?
Another factor to consider is that life expectancies are increasing at a rate close to one percent a year, making a person with a 20 year life expectancy at retirement actually live about 50% longer than the expectancy table reflects. Could the claimant outlive their settlement...not if it is a lifetime payout in a structured settlement annuity. If the injury is permanent, the settlement should be too!
If a trust officer, stockbroker, money manager, or financial planner advises they can exceed the total amount of payments on a net after-tax basis, have them issue a letter guaranteeing this statement, as our proposals are contractually guaranteed by a multi-billion dollar life insurance corporations.
We will be happy to review any of the proposals offered by financial advisors.