Would it surprise you to learn that, at current rates, a traditional balanced mutual fund would have to guarantee you an annual return (from day one and continuous year after year) of 6%, just to match what a 20-year tax-free structured settlement offers in guaranteed payments? We all know that with mutual funds, nothing is guaranteed, whereas a structured settlement offers guaranteed benefits. Quite simple, right? To make matters worse, structured settlement annuities often have guaranteed and expected returns that are listed in proposals. The internal rate of return (IRR) shown in the proposal is based on life expectancy. Different life companies use different life tables to determine life expectancy.
As a result, the same proposal from two different life companies could show two different internal rates of return. It is important to know that the IRR shown in a structured settlement quote is a compound rate. Keep in mind that short payments receive less interest than longer payments. The law served as the federal government's acceptance of the IRS ruling and extended restrictions to state governments, prohibiting them from taxing income from structured settlement of personal injury cases.
Fixed-rate products will be discussed in this document, focusing on the internal rate of return (IRR) and how it affects your customer's settlement. By calculating the price it will charge for an annuity, the insurer determines how much it would have to invest, at current interest rates, to generate a revenue stream at least equal to the required periodic payments. John Darer, a respected structured settlement consultant in Connecticut who writes the industry's “Watchdog” blog, has chronicled examples of people who took large sums of money after an accident settlement only to see it all go away because of family and friends with their hands open for loans that they were never reimbursed. Darer's blog is an important source of information and documents how, with a structured settlement, accident survivors cannot accelerate, defer, increase or decrease the flow of payment they agree to.
You can “collect” your future structured settlement payments by selling them to a factoring company at a discount if you need immediate cash. The discount rate often used in capital budgeting that causes the net present value of all cash flows for a particular project to zero. With a structured settlement, the present and future needs of injury victims can be combined with settlement payments. But for reasons that don't make any sense to me, Arnold points out that “Structured settlement brokers are generally prohibited from using this guarantee association endorsement for marketing purposes.
That's right, but, from my perspective and that of the many lawyers I've discussed, these issues with reducing the amount of interest earned are not as important as the security and other benefits offered by a structured agreement. Rather, in an unassigned case, the defendant is a property and casualty insurance company that purchases the annuity from an independent life insurance company. The most frequently asked questions about fixed-interest products, such as structured settlement annuities, generally focus on the rate.
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