A few years ago, we published an article on market volatility and how structured settlements provide significant advantages over the uncertainty of the financial markets. Whether it be the terrorist attacks of 2001, the mortgage financing crash of 2008, the Coronavirus crisis of 2020, or even the countless, more minor ups and downs of the economy, structured settlement annuities are safe and secure when everything else fails. To the credit of our blue-chip life company partners, structures always pay exactly as promised, on time and in full, regardless of whatever wild swings are taking place in the markets.
This historically challenging moment in history is the perfect time to revisit these advantages and remind all the parties to personal injury negotiations that structures can be the perfect solution to evaluate and quantify future costs, help settle cases and secure the funds against future risks.
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In a recent post, we talked about the ongoing roller-coaster ride on the stock markets, and how market volatility can decimate the settlement funds received by injured claimants. For these “unique investors,” who often face permanent injuries, lost wages and a host of future medical expenses, the last thing they can withstand is the risk of losing these dollars. The settlement funds received when closing out a claim are often the only monies available to these injured parties and should be specifically matched with their future needs—NOT placed in any variety of investment options that bring uncertainty, risk, and additional fees. It’s about preserving the settlement funds for very specific future medical and lost wage needs, not about chasing speculative returns in a very unpredictable and risky financial environment.
Structured settlements provide significant advantages over the market volatility we have seen so much of in the financial headlines over the past few years. Even sophisticated professionals can’t predict the ups and downs of the markets, so why risk the monies received in a settlement in a marketplace where nothing is guaranteed?
Our Top 10 Advantages
Advantage #1: Structured settlements are TAX-FREE. This means that payments received by injured claimants are not includable in gross income. They are not tax-deferred or discounted; they are tax-free per IRS Code Section 104(a)(2). This is a tremendous advantage for these “unique investors,” but one that can only be offered during the settlement of their claim and must be incorporated into the settlement documents. Once the case is settled and the funds disbursed, this option is no longer available. (Please see our previous article on the greatest gift the IRS ever gave to injured individuals.) In contrast, all growth from any kind of other investment is subject to local, state and federal taxation.
Advantage #2: They are guaranteed by highly rated carriers. Structured settlement annuities are only offered by a select group of highly rated life insurance carriers, those with long histories of providing safety and security for their products and their clients. During all the crises of the last twenty years, structure continue to pay as promised without skipping a beat. These carriers include: American General, Berkshire Hathaway, Met Life, Mutual of Omaha, New York Life, Prudential, Pacific Life and USAA Life.
Advantage #3: They can provide guaranteed lifetime income. Overwhelmingly, financial planners and retirement experts are talking about arranging streams of income for the future, rather than accumulating that proverbial nest-egg. This practice is subject to market volatility, risk, the temptation to spend unwisely, not to mention financial planning fees. The insurance industry, the US Congress, and the IRS blazed a different trail altogether more than 40 years ago with structured settlements. What could be more valuable to the injured individual than purchasing a lifetime annuity that creates guaranteed future, lifetime income? Oh, and by the way, did we mention it is all tax-free? (See Advantage #1 as well as our earlier piece on safeguarding your golden investments.)
Advantage #4A: They are NOT subject to market fluctuations. Remember the last post on “Market Volatility?” With ongoing headlines like “Another Steep Drop in the Dow Jones Industrials Today,” structured settlement annuities provide stability and security. The injured individual can sleep well, without concern for market fluctuations. Plus, the “fixed and determinable” payments are guaranteed by highly rated life insurance carriers (see Advantage #2) and are not affected by all of the entirely unpredictable investment risks at play in the marketplace.
Advantage #4B: They are NOT subject to market fluctuations. Ok, so I may be taking liberty with my list of 10 here, but am I over-emphasizing this? NO! While the S&P Index has averaged approximately 10% over an 89-year period, its growth has been wildly inconsistent. The market averages two bad years for every seven-year period, and monies lost in those years can be devastating. The down periods eat into principal and can double the damage when a withdrawal is made in the same year. The market rises and falls and money in the market is subject to that flow. Ask financial planners if they will certify or guarantee stated returns into the future; THEY WILL NOT. They will say that past performance is no indication of future returns. A structured settlement annuity will guarantee those stated future returns…in writing…guaranteed. (See Advantage #2 and #3.)
Advantage #5: They allow you to create a customized, flexible financial plan. Structured settlement annuities come in all shapes and sizes: for certain periods, for life, payable weekly, monthly, or annually. They can include periodic lump sums for reinvestment, or for specific future expenses. There are index-linked annuities to capture upside potential without the downside risk, and interest-rate linked options to capture future rate growth. There is even a joint and survivor option for spouses that avoids probate court and challenges to wills and trusts. Instead of taking the cash, and then wondering where to put it, structures enable the injured individual to design a financial future. Of course, planning must occur during the negotiation phase; once the case is settled, the benefit is gone forever.
Advantage #6: They help avoid premature dissipation. According to studies, 57% of plaintiffs exhaust all of the benefits that were meant to last a lifetime and often cannot pay for necessary medical costs. Losses may be the result of bad decisions, bad advice, or bad luck. The structured settlement alternative provides for guaranteed, tax-free payouts at any time, both for the exact purposes the injured individuals intended and those unexpected expenses that arise down the road.
Advantage #7: Size doesn’t matter. Structured settlement annuities may be purchased for as little as $10,000. If you hear that there is not enough money in the settlement to justify a structure, or the claim doesn’t apply because it isn’t a million-dollar case, that’s just plain wrong. You can annuitize small amounts to create college funds for young children, defer lump sums into the future for specific life events, or design retirement funds that supplement future income. Everything is locked, secure and tax-free.
Advantage #8: They match needs to payments. Often in the course of negotiating a larger or more complex settlement, the parties evaluate life care plans and economic loss reports. These documents very specifically outline the claimants’ financial needs over their lifetimes. Structured settlement annuities, unlike any other financial products, can match these needs to a specific stream of future payments that are guaranteed to be there when needed, and in the amount needed, without any jeopardy in from the markets. This helps the parties quantify the settlement and agree on the most significant costs early in the process. It also means that the medical and financial needs of the individual will be met according to schedule.
Advantage #9: They protect needs-based entitlements. Lump sum settlements are classified as assets, which means that they negatively impact your eligibility for needs-based income entitlements like Medicaid, AFDC, IHSS and SSI. Structured settlements, on the other hand, do not carry this risk, especially when combined with special needs trusts. Carriers can even settle cases where discussions were stalled because claimants and counsels thought they’d lose their much-needed entitlement benefits.
Advantage #10: They protect you from creditors. Because it is defined as an “assignment” rather than an “asset,” your structured settlement annuity avoids probate challenges and frequently protects the settlement proceeds from creditors arising from divorce and bankruptcy. Nothing is as financially bulletproof as a structure.