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Daylight!

Okay, a show of hands: how many of you have ever been to a mediation or pre-trial conference? I attend lots of them and when I am introduced, I am usually just referred to as “the structure guy.” (I really need to drop all the formal stuff on my business cards and have them made up to simply say: “Frank, the Structure Guy.”) My presence is usually met with appreciation. Sometimes just tolerance and indifference. And, yes, a few times with disapproval. I do not take these reactions personally; they merely reflect the posture of the parties and sometimes they indicate how a structured settlement is perceived by my “disapprover”.

These days add another reaction to my list of greetings: puzzlement. A few people look at me and can’t figure out what I’m doing at the meeting, with “interest rates being so low”. Well, wonder of wonders, it should not surprise any of you that these very people who say that “interest rates are low” are the very same people who said the exact same thing when tax-free structures paid 11%, 8%, and 6%. All those other times, it was “not a good time to structure” either. When I think of how much accumulated value has been lost by their clients over these decades it sickens me. That, and how much financial security was needlessly jeopardized by the lure of a big pot of cash which I am certain (and know for a fact in many cases) was rapidly spent and ultimately blown.

And yet I have to say that I also derive enormous pleasure from “flipping” these folks. Time after time, I am able to turn their puzzlement into amazement when they see how a properly designed periodic payment plan still fulfills the needs of an injured person, leading to settlement and a satisfied claimant.

Make no mistake; I recognize that interest rates are the lowest they have been since December of 2008. But remember that this is true not only for structured settlements but also for all interest-paying investments. It’s also not hard to understand why interest rates are low: it’s because every other investment option seems so unpredictable these days, people are afraid to put their money anywhere else. When they’re scared, they buy low-risk bonds; investors are willing to accept a lower rate of interest as the trade-off for security of principle.

In essence, some feel that the smart play these days is to park your money in a safe place for a while and wait for daylight to break in this otherwise dark investment climate. That seems like good advice, now how to put it into practice? We have a number of ways to accomplish this and an example may be the best way to show how it works.

Take the case of “Ned Devine”, a 45-year-old divorced man who was a passenger in a car that struck a utility pole. As a result of the collision, Ned sustained serious injuries to his right hip and back. Ned earns approximately $80,000 per year and, though he claims five months in past lost wages, he has now returned to work. He has two grown children and no liens or out-of-pocket expenses.

Ned’s case came up for mediation last week. Given Ned’s age and no dependent children, we designed a plan that provided a substantial up-front cash payment along with a guaranteed income of $1,000 per month for 25 years certain and life beginning December 1, 2011. This plan guarantees Ned $300,000 over 25 years and he could expect to receive in excess of $466,000 over his lifetime. The plan cost the defendants $238,146.

As this plan provided benefits over a long period of time, the tax free internal rate of return to Ned was 4.02%. At Ned’s current earnings, his overall tax rate is 34%. At that rate, the taxable equivalent yield of his structured settlement plan was 6.09%. This means Ned would have to find an investment that guarantees him 6.09% just to break even with the structured settlement we proposed.

If you ask around these days, you will find PLENTY of people who would be actively interested in a secure return like that. How much of a settlement to structure has always been a comparative financial decision and the only people who blithely dismiss the idea are simply those who have no clue as to what the other options are paying. Properly designed (and correctly compared) structures offer injured claimants something they actually want: financial security at a superior rate. Structures deliver exactly this (and some people wonder why I like my job…).

Even with this kind of return, Ned was convinced that he might do better when the investment climate improves. With that in mind, we shortened the timeline from life to fifteen years. Ned’s taxable equivalent over this duration was 4.62%.
But Ned thought the investment climate might improve even sooner than that. So we shortened it to ten years with a full return of his initial invested sum in a single lump sum at the end of the ten years. Ned’s taxable equivalent yield for this plan was 4.03%. Just for the record, a 10-year Treasury bond currently yields a taxable 1.99%.

Given his opinion of how the investment world was going to play out over the next ten years, this plan kept his money safe, locked in a superior net return, and guaranteed that he’d have it all back to reinvest when the opportunities might be more favorable.

Ned liked this approach and he settled his case using this plan. But remember: it was made possible ONLY by the unique combination of non-taxable and guaranteed return that he had qualified for by way of his physical injuries. Structured settlements offer unique benefits in ANY interest rate environment. Even this one. No kidding.

Working on a bodily injury claim? Want your next settlement offer to contain the kind of benefits that Ned found so valuable? Call Frank C. Kilcoyne, CSSC at 800-544-5533.  I am here to help.