Structured settlements for seniors, retirees, or near retirees, what's the benefit?

According to published sources, one of the biggest concerns of the elderly is outliving their income. In fact such concerns are not limited to seniors, 43% of 18-29 year olds and 53% of 30-64 year olds expressed concerns of outliving income after retirement, according to a January 30-February 2 2008 Gallup Poll. A Met Life's Employee Benefits Trend Study conducted in 2003, 48% of employees rank "outliving their savings". The fact is that people are living longer. According to the New England Centenarian Study, people over 100 are the fastest growing segment of the population in the USA with people over age 85 as the second fastest growing segment! Many life insurance companies are now projecting a death benefit to age 120, when age 100 seemed like a major accomplishment. According to USA Today, the number of Americans aged 70 and older is expected to double by 2035¹.

Fewer employees today can rely on the old fashioned defined benefit pension plans (when employers save for them and guarantee lifetime income). The 2008-2009 stock market has plundered many 401(k)s and other defined contribution plans with many seeing drops in value of 40-50%. Others may have unfortunately become victims of various frauds. For a risk averse senior who is settling a personal injury case, the safety, security, and guarantees inherent in a structured settlement should be of real interest. Structured settlement payments can be designed to maximize current income and provide for beneficiaries such as a spouse, children, or grandchildren, if desired.

Structured settlements can be funded with structured annuities issued by major life insurance companies, OR with obligations of the United States government ( read about United States Treasury Bond Structured Settlements ), in accordance with IRC 130(d).

Structured settlements for seniors examples, using a structured annuity²:
Assuming a married couple, both age 65 have $100,000 to structure. Both are currently in good health.

Example One
Income tax-free monthly benefit of $584.25, Joint and 75% Survivor³ with a 15 year guarantee. This provides a guaranteed income of $584.25 per month for 15 years. Thereafter, the couple continues to receive $584.25 per month until the death of one spouse. The surviving spouse then receives monthly benefits of $438.19 (75% of $584.25) for the rest of his/her life. In his example, the certain amount our couple would receive is $105,165.60, while the expected amount (to the end of their joint normal life expectancy) would be $151,321.89. The income tax-free rate of return on the aforementioned structured settlement option (based on their combined life expectancy) is 4.02%, while the approximate taxable equivalent yield is over 5.42% (assuming a 28% marginal tax rate).

Example Two
Income tax-free monthly benefit of $561.51, Joint and 100% Survivor³ with a 15 year guarantee. This provides a guaranteed income of $561.51 per month for 15 years. Thereafter, the couple continues to receive $561.51 per month until the death of one spouse. The surviving spouse continues to receive unreduced monthly benefits of $561.51 (100% of $561.51) for the rest of his/her life. In this example, the certain amount our couple would receive is $101,072.47, while the expected amount (to the end of joint normal life expectancy) would be $148,239.21. The income tax-free rate of return on the aforementioned structured settlement option (based on their combined life expectancy) is 3.91%, while the approximate taxable equivalent yield is over 4.57% (assuming a 28% marginal tax rate). According to www.Bloomberg.com, on 01/16/2009 the tax-exempt municipal bond rate for 15 years was 4.16%. Bear in mind the bond term is fixed at 15 years, after which the principal would need to be reinvested at then current rates, which could be higher or lower. Thus the utilization of municipal bonds would not be able to contractually guarantee lifetime income as the structured annuity would.

Benefits of structured settlement for seniors, retirees and near retirees:

• Spouses can count on tax exempt income for their entire lifetimes using structured settlements ;
• The level of monthly income is generally greater than what can safely be obtained (after-tax) from other conservative investments, without the uncertainty and volatility;
• Use rated structured annuity to fund irrevocable life insurance trust (ILIT), if medical risk factors allow the arbitrage. Claimants with health impairments may benefit from a rated age and use the resulting savings on the cost of annuity payments to help offset the increase in life or second-to-die life insurance⁴ premiums resulting from the same condition.
• Guaranteed monthly payments could be paid to children or grandchildren. Some Life carriers offer a commutation rider which would serve to pay any remaining guaranteed payments to the children or grandchildren in a lump sum.
• We can design numerous plans to fit your or your individual client's needs. If your or your client's financial circumstances are such that they still have a sizeable nest egg and have a more aggressive approach to investing, then a variable structured settlement may be appropriate.