Frank C. Kilcoyne, CSSC

Back in Time

My wife Beeb and I celebrated our twenty-fifth wedding anniversary this month. Flipping wistfully through some old photo albums and scrapbooks, our kids could hardly believe that I was the guy standing next to their mother - a fine slim fellow with a full head of hair. My sense of nostalgia carried over into the office the next Monday, when I pulled out my file of old newsletters to see what was shaking way back when.

As indicated by the Volume number above, I have been putting out this newsletter every month for the past 26 years. I’m sort of amazed that I’ve had that much to say. On the other hand, the August 1989 edition of Structured Settlements Review is just as relevant today as it was the day I wrote it. It was titled “Comparing Structured Settlements with Other Investments” and – not at all to my surprise - the additional value offered by structures is just as great today as it was back then.

Twenty-five years ago I said that “the inherent yield on structured settlements has been and is likely to continue to be better than the after-tax rate of return on comparably safe, long-term investments”. I emphasized that guaranteed structures outperformed other "safe” investments because “the income build-up in the annuity contract flows tax-free to the claimant.”

Even though my newsletters were published and distributed on plain old paper back then, I did manage to include a chart documenting how from August 1986 to August 1988 the yields of a structured settlement had been consistently 15% to 20% higher than taxable U.S. Government bonds and “tax-free” municipal bonds. The chart had originally been published by Merrill Lynch Settlement Services in January 1989.

Markets have risen and fallen over the intervening years, but that margin of superiority has remained remarkably intact. A quarter of a century later, in August of 2014, structured settlements outperform the after-tax yield of long-term U.S. Treasury bonds by 20% and they provide an 11% greater payout than the national average of AAA-rated tax-free municipal bonds.(1) This is a documented fact. Structured settlement annuity payouts consistently outperform other similar investments of comparable quality.

Knowing this, it amazes me when I hear a claimant’s “friend” or family member urge him to reject a structured settlement because they know a financial planner/bank trust officer/cousin Fred who can do “just as well” by taking a cash settlement and investing it in:

Municipal Bonds: After all, so-called “muni’s” are “tax-free” and safe just like a structure and the claimant gets to keep control of their money, right? Well, that all depends. Municipal bonds pay lower interest rates than structures (always have) and they are not nearly as flexible design-wise. They cannot offer payments guaranteed for life. While municipal bonds are exempt from federal and local state taxes, they are NOT exempt from taxation by other states (if you live in New York and buy Massachusetts bonds, for example, you’ll wish you hadn’t.)

The REAL mistake in choosing municipal bonds over a structured settlement is that these days you can’t actually lock in the interest rate long term with any certainty. The terms governing early bond redemptions are known as “call features” and if you plan to buy any kind of bond today, you had better learn what they are. The vast majority of municipal bonds sold today are “callable” and those that aren’t sell at such high prices that it’s hardly worth buying them. This means that the interest rate you think you are locking in for “X” years may be redeemed early in only “Y” years – when it is to the bond issuer’s advantage to call it in and to your disadvantage to lose it.

U.S. Treasury Bonds: while Treasury obligations provide guarantees of payment, the interest payments they provide are subject to federal income tax. When you compare the current after-tax yield of United States Treasury bonds to a proposed settlement annuity, the structure prevails every time. United States Treasury bonds are not nearly as flexible as structured settlements design-wise and also cannot provide payments guaranteed for life.

Other Investments: In the Wall Street Journal’s “Intelligent Investor” column, Jason Zweig wrote an article entitled “Net-Net-Net returns On Most Investments”.(2) The premise of the article is that the vast majority of investors have exceptionally unrealistic expectations about what they can yield on most investments net of taxes, net of fees and commissions, and net of inflation. After all of those elements are factored in, the best that most investors in America can expect ranges from .5% to 4% annually. When compared to structured settlements yields, net of taxes and fees you have returns ranging from 2% to 5% on many contracts. Why assume some serious risks for little to no additional return?

Back in 1989, when I wrote that original newsletter, the top federal income tax bracket was 28%; today it stands at 39.6%. Why would anyone choose to expose themselves to an ever-increasing income tax burden when they don’t have to?

Do you have a case where the claimant is considering “other investments”? Want to help them make a more informed - and potentially much more rewarding - decision? Call Frank C. Kilcoyne, CSSC at 800-544-5533. I am here to help.


(1) For a taxpayer in the 28% federal tax bracket; state income taxes would make this margin even larger. Treasury bond yield source: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield Municipal Bond yield source: http://www.fmsbonds.com/Market_Yields/index.asp

(2) Jason Zweig, “Why Investors Keep Fooling Themselves,” The Wall Street Journal, January 1, 2010