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"The Yield is HOW High?"

 

4.75%. Tax-free. And fully guaranteed.

If that number jumps off the page at you, you are not alone. I just returned from a pretrial conference where I was asked if a structured settlement was a viable option given the current “low interest rate environment”. I ran that calculation and when I provided it, the inquiring attorney’s response bordered on disbelief. And yet, that is the correct number. If you think structured settlement rates are “low”, well perhaps you need to update your thinking.

How far we have come. Yes, we did indeed have a serious dip recently when it seemed the whole world suddenly decided to buy US Treasurys. But that was only temporary and the pricing improvements have been positive and steady for much of this year. Again, I ask: does a 4.75% non-taxable and guaranteed rate of return sound attractive to you? Most of my friends answer “yes”; most of the claimants I talk to say “yes” also.

Now not every plan will have that return because interest rates vary with the duration of the payment stream. But no matter where interest rates go, structured settlements always offer extra value because they have an unfair advantage: a special section of the tax code which converts their already (corporate bond-ish) higher yields into non-taxable income for physically injured claimants.

The financial press has been pounding and pounding on where US Treasury rates are but this is a bit of a distraction from where structure rates are for a variety of reasons. First, structured annuities are indeed backed in part by treasury bonds, but that’s only part of the investment portfolio. As those rates go down, certainly it pulls structure rates down somewhat with them. But the vast majority of assets backing settlement annuities are actually high grade corporate bonds which pay much higher rates than Treasurys. This creates room for the annuity issuers to cover their costs and build in their profit and still beat government bonds by a long shot.

Another reason structure rates are so much higher than Treasurys is that the market for US Treasurys has been pulled all out of shape lately. Between February of 2011 and July of 2012, the global financial markets went into a bit of a spasm and the whole world abandoned yield in return for safety. All this demand had the effect of driving down the interest rates on US Treasurys to their lowest point in 50 years. But that absolute low point didn’t last long and they have already rebounded, rising over 60% since that low.

That’s why our rates are so good now, and we have reason to think they could improve yet. At some point here, the Federal Reserve is going to stop their big bond buying program (“Quantitative Easing”) and that could further lift yields.

I am not saying that I know when or by how much the markets will move, and I do NOT recommend anyone try to get smart and wait on funding a settlement for the chance that they’ll snag a better rate by waiting. That is a very dangerous game which I wrote about fifteen years ago, the last time people felt “smart” about interest rates. Bad plan.

Most people should simply be aware that structured settlements offer significantly attractive yields and they continue to do exactly what they have always done, which is to permit folks to identify critical future financial needs and fund them now, while they actually have the money. Whether it’s college expenses, mortgage payments, or lifetime-guaranteed retirement income, the kinds of returns we are seeing make it a pretty silly thing to ignore. Dangerous for trial attorneys who have an ethical “duty to inform”, but also dumb for defendants to forget to tell claimants about. There is free value here; the parties are negotiating, why not bring this instant value-increaser into the dialogue? In the final mile, it can work wonders.

I want to raise one other issue: Great Depression Babies. What does this have to do with structured settlements? Well, they are now dying off now and, sad as that is, they are being replaced by an equally scarred but different population: “80s Inflation Era Babies”.

Many of my best clients who are at the peak of their professional careers now were young adults in the late early 1980s when our country suffered a savage up-spike in inflation and a related huge leap in interest rates. It was so strange – you could get 17% in a money market fund- yes, 17%. No kidding. But, for all its ferocity, it didn’t last long. Still, that jolt hit many people hard.

I believe many professionals in their 50s and 60s have been permanently scarred by that experience. Whenever someone tosses an “interest rates are low” objection, it more often than not is someone in that age bracket.

Some never get over it and there is little I can say to help them see where things actually are NOW. “I remember when structured settlements paid 12%!” they will say. Okay, fine. I remember when I could buy a pack of Juicy Fruit gum for a nickel. So what? That was 30 years ago… You live now. Most importantly, the claimant whose case we are settling not only lives now but has to somehow keep on living, often for many more decades to come.

A guaranteed source of non-taxable lifetime income is an extraordinarily valuable thing. We create them every day for grateful claimants who are relieved to have their lawsuit over with – and relieved to have achieved a measure of financial security few have ever experienced before.

Were you aware of how structured settlement rates have improved? Want to explain these improvements to an injured claimant? Call Frank C. Kilcoyne CSSC at 800-544-5533, I am here to help.