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Are Injured Claimants "Investors"?

Some people tell injured claimants to take their whole settlement in cash to “take advantage of superior investment opportunities”. Not surprisingly, some of these people have something personal to gain from it: family members who wish to open a restaurant or stockbrokers trying to accumulate “assets under management”.

But if investing is by definition something a person does with extra money, are most claimants actually making “investment decisions” at settlement? How many of the claimants you deal with on a daily basis have their financial houses in such order that they can afford to put settlement funds at risk in pursuit of “superior returns”? Darned few, in my experience; most people are just trying to keep the lights on.

This an important question because it frames the settlement debate: are we meeting to discuss actual amounts a person needs to feel fairly compensated or are we meeting to argue theories of asset allocation? The latter might be intellectually satisfying (to a few) but it really doesn’t help most people make a good decision for themselves.

Financial security is built from the bottom up. Does this person have a secure source of income? Do they have cash in the bank in case of emergencies? Have they purchased insurance to protect against catastrophic events? Until a claimant can answer “yes” to all three of these questions, there is no “investing” to talk about.

Many of the claimants I work with are in precarious financial shape. Whether this is from the destabilizing effect of a bad injury, poor judgment in managing their financial affairs or the simple bad luck of losing a job during the Great Recession, the impact is the same: most people are simply looking to get back on their feet before they can even think about reaching for the sky.

That doesn’t mean they aren’t human. Being injured and having to hack your way through the claims and legal process is hugely stressful; people naturally seek some form of stress relief by way of their settlement. Put yourself in their shoes: imagine that you are about to receive in one payment the biggest pile of cash you have ever seen. Do you think you yourself could “invest” it wisely? It’s harder than it looks. We have all heard the riches-to-rags stories that constantly swirl around various celebrities, athletes, and lottery winners who “hit it big”. They aren’t pretty.

The stubborn fact here is that no matter how large a pile of cash a claimant is set to receive, it will still be a finite sum of money. People can – and do – run through it faster than they ever thought possible. And word gets out. And then they can count on having plenty of “help” in the spending and “investing” departments.

Do not get me wrong, I am not saying that no one can manage these situations, I am simply saying that for most it is challenging in the extreme and they are going to make mistakes.

At a minimum, what they need is a way to survive the learning curve, a way to buy a little time to develop the maturity, skills, and self-control necessary to establish and sustain true financial security.

Structured settlements offer an outstanding way to provide this support. As we discussed last month, structures work best when designed to meet an injured person’s specific financial needs if they can articulate them. Our gentleman last month knew exactly how much he wanted every month to feel financially secure, right down to the amount he needed for pet food !

But if a person doesn’t know exactly what they will need, structures can still work well as a way to simply buy them time gain experience and to develop self-control and investment savvy.

Here’s one way to do that: after clearing liens and paying attorney fees you provide ample cash up front for the claimant to do at least some of the things they have been contemplating (pay off credit cards, new car, vacation). Then just create a settlement plan which mimics the payment pattern of a bond. Namely: semi-annual interest payments with a return of principle down the road. Example:

Cost                                                                                                   $100,000

Interest Payments $ 1,538 payable semiannually,
Guaranteed for 10 years beginning in six months.                  $ 30,760

Return of Principle $ 100,000 paid as a
Guaranteed lump sum 10 years from funding.                         $100,000

Total Guaranteed Benefit                                                             $130,760

This simple plan would provide a claimant an income stream over time as they gain valuable life experience, and then it releases back to them the full settlement amount to invest from that point forward as they see fit. This life lesson comes with an added bonus: those interest payments are guaranteed and completely income tax free. Imagine that - a settlement plan that not only measurably increases the total amount received, but one which imparts wisdom as well. Amazing!

Want to craft a few “amazing” settlements yourself? Call Frank C. Kilcoyne, CSSC at 800 544 5533. I am here to help.