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Why Would My Client Structure with such Low Rates of Return?

It is no secret that the returns on structured settlement annuities are not glamorous. In fact, many investments outperform these annuities by a large margin, especially if you ignore taxes, expenses and dissipation risk. In recent times, the returns generated by settlement annuities have hovered around 5.5%. A moderate—risk portfolio of securities can easily surpass that return. But these higher rates of return are accompanied by volatility, expenses, taxes and dissipation risk. In addition, the client may miss out on an opportunity to capitalize on a rated age.

A portfolio of securities is subject to market volatility whereas a structured settlement annuity is guaranteed by one of the highest-rated life insurance companies. These companies have a well documented history of faithful payment. If the securities markets suffer aloss, it could impair the client's ability to pay ongoing medical bills or living expenses. Most injured parties cannot afford to chase high returns by putting their recovery in jeopardy. The portfolio also bears accompanying expenses that eat into that higher return. In many cases the fees may include financial advisors fees, trust fees, and investment fees and commissions. These fees must be subtracted to get an expected rate of return net of them.

Next, we need to worry about taxes. Compensatory damages for personal physical injury are tax free and IRC Section 104(a)(2) extends this exclusion to periodic payments received for these damages. Therefore, if a recovery is structured, the benefits are income tax free when they are received. However, if the recovery is invested in a portfolio instead, the client will have to report the income generated on his or her tax return. These taxes will further reduce the net return for the client. So, to make the comparison fair, we will need to subtract these taxes from the net return after fees of the client.

Our next consideration is just one of the harsh realities of working with injury victims. Many are unprepared to select a trustworthy and competent financial advisor, choose 4 suitable portfolio, pay the taxes on their portfolio earnings, and to manage their withdrawal rate from that portfolio. Financial advisors often tell us about what "terrible" clients, injury victims make. In reality they often have not had the chance to develop the discipline, advisor network and patience to manage their own money. Therefore, think about this question, "Three years from now, how much of those funds will still be earning that higher rate of return." Often, foolish decisions result in the dissipation of their recovery next egg.

When a claimant has sustained an extensive injury, the claimant may qualify to receive a rated age from the medical underwriters at the annuity company. The underwriting can be based on injuries sustained in the alleged accident, health before the accident (i.e. obesity, smoking, high blood pressure, diabetes, etc) or both. This uprate allows the annuity to distribute a substantially higher payout on a tax free basis than the safe withdrawal rate from most investment portfolios.

In most situations a structured settlement annuity will help ensure that money is available to provide for ongoing care and living expenses. They are not necessarily built to compete in terms of investment return, but they are safe, guaranteed, expense free, nontaxable, worry-free cash flows designed for the unique needs of personal injury victims.
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