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Considerations of a Claim Settlement

Until recently, most professional financial advisors, economists or individual investors felt comforted by a belief that the stock market would provide ever-increasing returns: everyone “knew” that if the market did go down it would come back up shortly. Other experts “knew” that real estate values would go nowhere but up. After all, they would say with a grin: “They’re not making any more land, right?” With such “known” truths in place, some experts proclaimed it foolish to allocate significant sums to any kind of fixed-income vehicle such as the kind of annuity contracts that back most ordinary structured settlements.

Markets that go down may indeed “always” come back up, but waiting for those recoveries often takes time... something many seriously injured claimants don’t have enough of.

The market collapse at the close of this decade profoundly affected most people’s financial planning. Diversified investments that were supposed to offset each other’s risks by responding differently to the economic cycle (so-called “negative correlation”) surprised everyone by instead all falling at the same time. This caused broad decreases in the value of 401k plans, supplemental investment portfolios, and a loss of equity in most homes. Such broad market turndowns meant particularly harsh consequences for those who rely on dividends or other investment income for their very subsistence. Many have no cushion and cannot afford to wait out a market recovery which, if it comes at all, may come too late for them. Clearly, the collapse of the financial markets of 2008 and 2009 sparked a whole new security emphasis on the question of how best to handle an injured plaintiff’s settlement proceeds.

The need for security and dependability only accelerates with severity of injury and the need for future medical care. What factors must be considered when “investing” an injured plaintiff’s settlement proceeds? Available benefits, costs, and risks must all be balanced in determining the “best” means of allocating settlement proceeds to provide for current and future needs.

Benefits How much cash flow is needed when to cover what identified financial needs? Is income needed for life or for a limited time only? Will a level stream of income work or should payments be scaled to increase over time? How might such payments affect other benefits such as financial aid for college, Social Security and Medicare/Medicaid eligibility?

Costs Investment costs reduce returns and taxes stand as one of the largest such costs incurred by investors. So it is for injured claimants, if they elect to receive all proceeds in cash and subsequently to invest it.

Annual money management costs can add up faster than most novice investors realize too. [One of my favorite television commercials sums up this category of investment costs far more succinctly than I can. You know the one: a group of babies are bemoaning their “Big Expensive Broker” sending them photos of his new yacht. Then one of the babies falls deeper into despair when he realizes the “Big Expensive Broker” is eating lobster in one of the photos.] Whether or not your investments are in the black, you may still be earning far less than you think once accumulated fees and costs are added in. Worse still, the only way to recover from sub-par returns is to earn even higher returns in the future. How? There is no other way except to assume greater risks – precisely what many injured claimants have already had enough of.

Risks Investment risks come in many forms:

• Longevity Risk: the risk of outliving your money;
• Investment Risk: the risk of losing value on your investment;
• Default or Credit Risk: the risk of promised money going unpaid;
• Reinvestment Risk: the risk that when a time deposit (like a CD) matures, you        will not be able to reinvest the funds at an equivalent rate;
• Liquidity Risk: the risk that you may not be able to convert an asset into cash when cash is what you need;
• Dissipation Risk: the risk that direct access to funds may lead to premature spending leaving insufficient funds to       cover future needs;
• Inflation Risk: the risk that the value of future payments will be eroded by inflation.

While they are surely not a complete solution for all cases, throughout this recent economic downturn, the reliability of structured settlement payments stood in bold relief against the scary and volatile gyrations of the market. All who structured at least a portion of their settlements received payment on time and in full.

But not everyone did so well. Some had cashed out entire (and sometimes very large) settlements only to find themselves rocked by the financial storm. We hope they weathered it okay... but we have serious doubts about how most of them fared.

A properly designed structured settlement offers high net returns at low risk. They incur no taxes and incur very low costs. The availability of lifetime payments transfers longevity risk to the issuing annuity company so claimants cannot outlive their benefits. To be blunt: in this day and age ALL plaintiffs should consider a structured settlement for at least a portion of their settlement.

Want to build a settlement plan your injured claimants can depend on? Call Frank C. Kilcoyne CSSC at 800 544 5533, I am here to help.