A Primer on Structured Settlements
A structured settlement is simply one investment alternative. A certain sum of money is “invested” with the annuity holder, which guarantees a specific rate of return on the investment by promising to make future payments in certain amounts. The advisability of the investment depends in large part on whether the plaintiff is likely to be able to obtain a more favorable return from another type of investment.
It is not necessary, and often not advisable, to commit the entire settlement amount to a structured settlement. Often, a portion of the settlement proceeds will be used to purchase an annuity, as a way of diversifying the overall investment portfolio, and creating a guaranteed income stream. The guaranteed rate of return on the structure will help to ameliorate the risk of other investments that may or may not outperform the structure.
Aside from the mathematical calculations, there are other considerations that may factor into the advisability of accepting a structured settlement. Some injury victims are either incapable of managing a large sum of money, or reluctant to do so. Others are potentially vulnerable to approaches from friends or family to fund their business ventures or provide personal loans. Once an annuity is purchased, it is generally not possible to accelerate payments if the recipient’s financial circumstances change, so alternative sources should be available to meet unanticipated financial emergencies.
In general, it’s not worthwhile to structure a payment that will be received only a few years in the future. Because investment predictions are more accurate in the shorter term, the likelihood that a competent advisor can improve upon the return offered by a structure is high. On the other hand, payments 40 or 50 years in the future are fraught with uncertainty, in the plaintiff’s personal circumstances, in the rate of return, and in the financial stability of the payor. Contrary to the belief of some clients and lawyers, even relatively small amounts ($50,000-$100,000) may be sometimes structured to the client’s benefit.
The decision to accept a portion of a settlement in the form of an annuity must be considered carefully, after proper advice from legal and financial professionals. A rational decision must include consideration of the actual cost of the annuity (amount being paid to secure the future payment stream), the interest rate or so-called “rate of return” represented by the annuity payments compared to its cost, the anticipated future financial needs of the victim and his family, and the other financial resources available to meet those needs.