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Structured Settlements vs. Other Investment Alternatives

Structured settlements are primarily used to provide stable continuous income and to address longevity risk, however, financial planners, financial advisers, other Investment representatives, plaintiff attorneys or even plaintiffs themselves occasionally raise questions about the rate of return on structured settlement annuities compared to other investment alternatives. It is important to keep in mind that these structured settlement payments when payable for personal injury, physical sickness, wrongful death or workers compensation pursuant to IRC 104(a)(1) or IRC 104(a)(2), are totally income tax free. On the other hand the investment return on the settlement proceeds received in cash and outside of a structured settlement will generally be taxable as to income, capital gains, or both.

What if I just took a lump sum and invested it myself instead of a structured settlement?
The income generated by investment of a large cash lump sum settlement could subject the plaintiff to higher tax brackets. Therefore, considering federal and state taxes and your tax bracket, you would need to earn 20% to 40% greater rates each and every year throughout a lifetime (or the term of the structured settlement if not a lifetime or life contingent annuity) to equal the same rate of return as the structured settlement on a net after-tax basis. The number that you need to earn on a taxable basis to equal the internal rate of return on the structured settlement payments is sometimes referred to as the "taxable equivalent yield" or "taxable equivalent internal rate of return".

If the plaintiff has health considerations, significant future medicals, but uncertain mortality, "rated age" structured settlement annuities with a deferred start date could function as a "backstop," and could produce a higher taxable equivalent rate of return.

Timing of the market is not easy. The results of a 2016 study by Morningstar covering a 20 year period ending in 2015, demonstrate what the result might have been if you missed the best trading days, which suggests that over the same time frame you might have done better or been been highly competitive with an allocation to a structured settlement, without enduring the market risk or volatility.

If you stayed invested for 5040 trading days from 1996-20158.2%
If you missed the 10 best trading days from 1996-20154.5%
If you missed the 20 best trading days from 1996-20152.0%
If you missed the 30 best trading days0.0%
If you missed the 40 best trading days-2%
If you missed the 50 best trading days-3.7%
Source: Morningstar The Cost of Market Timing 2016

Liquidity can be provided by pairing the structured settlement with a settlement preservation trust, settlement conservation trust, or a special needs trust if there is a need to protect public benefits. The use of a "structured annuity backstop" is a strategy that facilitates a greater cash component and greater liquidity.

Caution About Structured Settlement Derivatives Mislabeled and Marketed to Investors , Including Injury Victims, as “ Secondary Market Annuities”, “SMA” or “SMIA”
An investment in structured settlement payment rights is not the same as buying an annuity. Don’t be fooled that the person selling it has an insurance license, is a settlement or financial planner who sells other annuities and calls it an annuity. It is not an annuity. It is not an insurance product. It is not issued by an insurance company. It carries risks that are greater than an annuity. Some investors in secondary market annuities have lost all their money in a relatively short space of time. In a recent chilling example, on the advice of her Pittsburgh Financial adviser, PA resident Linda Wall was sold a “secondary market annuity” for her retirement funds from a New Jersey Company called Altium Group in April 2012, which advertises “Secondary Market Annuities are considered by most to be high-yield, low-risk financial products.” Linda Wall’s January 26, 2017 Better Business Bureau review of Altium Group speaks for itself:
    “I entered into a contract with Altium LLC in April of 2012 to buy a structured settlement for $152,833.37 with a return of $191,128.92. It was granted through the Florida court system then overturned because of fraud and our monies were never returned to us. Altium is now saying they are not insured and don't have those kinds of funds to return our money. My retirement savings are gone and they don't seem to think it is their problem. Be very wary”. For more information see Robert Wall and Linda Wall vs Corona Capital, LLC and Altium Group, LLC WD Pennsylvania Case No. 2:16-CV-01044-MRH, filed July 15, 2016.

Structured settlement annuities are regulated insurance products sold by license agents or brokers. Structured settlement payments are contractually guaranteed through customized (bespoke) structured annuities that we place with a multi-billion dollar life insurance company (or companies). If you have any doubts and think you can do better with your investments while minimizing risk, consider "Monte Carlo simulation" as an effective means to illustrate (to attorneys or plaintiffs) the volatility of investment returns with certain hypothetical investment mixes (on settlement proceeds) against the amount and timing of the plaintiff's absolute needs. It may be helpful to you.


Notes:

*Source: Morningstar 2016, Morningstar data is unmanaged, reflects the reinvestment of dividends and capital gains, bears no management fees or operating expenses and is not available for direct investment.

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The tax-leverage inherent in a structure offers the plaintiff significant advantages over alternative investment choices.
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"Buy an annuity cheap, and make your life interesting to yourself and everybody else that watches the speculation". Charles Dickens, from Martin Chuzzlewit Chapter 16
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