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"I See Your Point"

A few weeks ago, I was speaking with an attorney about the various settlement annuity payout plans we had designed for his client.  There came a point in our discussion when he asked me if a structure was a good idea “given the current interest rate environment.”  I replied that a lot of people had asked me that question. In fact, over the 25-year course of my career, I have probably been asked that question a few thousand times.

It’s a fair question and I don’t mind answering it.  People just want to know if they are doing the right thing.  But the curious thing about this particular question is that people have asked it of me in every single kind of interest rate environment there is: rates going up, rates going down, rates going sideways.  No matter where interest rates are, people want to know if that particular moment is a “good time” to structure their settlement.   

Before I share with you my answer, let’s take a step back and remember that every financial decision you ever make is only ever made relative to the other alternatives available to you at the time.  You only have so many choices; you can neither predict the future nor change the past. Settlement time is settlement time and your choices are what they are. 

Luckily for injured people, they qualify for one special option that no one else gets: a guaranteed non-taxable income stream that effectively pays the same rates – or higher - as taxable investments of similar quality.  This tilts the equation in their favor, so the short answer to the attorney’s question is: “Yes.  Structuring a portion of your client’s settlement is an excellent idea, even now.” 

Frankly, things really are upside down now from where they were just a short time ago.  Even a year or two ago, some people were still “searching for yield” but after seeing even the “gold bugs" (1) get burned, many have simply given up and are just searching for a place to put their money where they will not lose.   

Big institutional firms – indeed, even countries - are buying U. S. Treasury bonds as fast as they can get them and the demand for this degree of security has really driven their rates down hard.   These buyers are clearly favoring safety of principle over yield and buying the most obvious thing they can: U.S. Treasury bonds. 

Many claimants may feel the same way but luckily, they have more than one choice: besides treasury bonds, they can establish a structured settlement.   

How do structured settlements and U.S. Treasurys compare?  What if a claimant was considering taking an all-cash settlement and investing it in Treasurys versus crafting a non-taxable structured settlement?  We ran a test a few weeks back and the results might surprise you. 

For our comparison we used a payment plan that mimicked a Treasury bond with a 25-year maturity and an invested sum of $1 million.  U.S. Treasury Bonds are taxable at the federal level but not by states. Structured settlements are of course not taxable either way.  Have a look:

 

                                                                                                Annual      Current       SS is

Net of Tax at a Marginal rate of  28% (Federal)        Income        Yield        Better by   

 

Treasury Bond                                                                       25,397.87      2.54%     28.03%

Structured Settlement                                                           32,517.98      3.25%

 

                                                                                                Annual      Current       SS is

Net of Tax at a Marginal rate of  33% (Federal)        Income        Yield        Better by   

 

Treasury Bond                                                                      23,634.13      2.36%     37.59%

Structured Settlement                                                           32,517.98      3.25%

 

                                                                                                Annual      Current       SS is

Net of Tax at a Marginal rate of  35% (Federal)        Income        Yield        Better by   

 

Treasury Bond                                                                       22,928.98      2.29%     41.82%

Structured Settlement                                                           32,517.98      3.25%

 

 

So there you have it: the only place a claimant can put their money that rivals the security of a U.S. Treasury bond is a structured settlement and the structure provides a far superior rate of return.  Believe me, if the large investment firms could gain access to a structured settlement on the same non-taxable basis as injured people, they would be lining up around the corner for the chance to get in.

One additional stark truth bears mentioning: which investment a claimant “should” invest in is often largely an academic exercise. Sadly, for the vast majority of claimants, if they fail to allocate a significant portion of their recovery to a structure at the time of settlement, it is never in fact going to ever get “invested” safely anywhere.  There are just too many wolves lining the path to Grandma’s House.  All-cash settlements often represent the worst “security” of all. 

In the end, my attorney friend nodded his head and simply said “I see your point.” We crafted an excellent plan which provides secure payments that his client can count on for many years to come. 

Were you aware of what a good value structured settlements offer in these uncertain times?  Want to explain these advantages to an injured claimant?  Call Frank C. Kilcoyne CSSC at 800-544-5533, I am here to help. 

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(1)  A common reference to people who invest in gold, believing it to be the one “safe” haven in a crisis.