There is a gross misconception that structured settlements offer rates of return well below market standards, precluding them from serving as a viable settlement option. In reality, rates of return on structured settlements are very much in line with rates offered by other fixed income investments. Structured settlements produce returns that are net of income tax, and they continue to offer, invariably, the best combination of the greatest “real” rate of return for the least amount of risk. In assessing the relative merits, here are four reasons why claimants should consider incorporating structured settlements into their plans for long-term financial security.
#1: Preferential Tax Treatment
We all know that proceeds from a personal physical injury or physical illness settlement, whether accepted in the form of a lump sum or as a structured settlement, are tax-free. What some people don’t know is that if a claimant places the settlement proceeds into an interest-bearing bank account or a traditional investment vehicle—mutual funds, for example—any interest earned may be taxable. If a claimant elects to utilize a structured settlement, the money grows 100% income tax-free, offering the potential for a greater net return. The only other U.S. investment option allowing tax-free returns is municipal bonds, making structured settlements a market leader when it comes to tax treatment.
#2: Guaranteed Rate of Return
Dalbar’s 2017 Quantitative Analysis of Investor Behavior study reported that as of December 30, 2016, the average investor was underperforming the S&P 500. The study also found that the 20-year annualized return for the average equity fund investor was only 4.79%. Unfortunately, many investors try to “play the market” instead of giving their money time to grow, resulting in a poor return on investment.
Here’s the kicker with structured settlements vs. traditional investments: the return on structured settlements is guaranteed1 and backed by highly rated insurance companies. They are insulated from the volatility of the market, so even if the market is in a freefall, the structured settlement payments do not fluctuate. When you consider that your client has suffered a personal injury, wouldn’t it be prudent for them to consider a financial strategy with a guaranteed return and limited exposure to risk?
For claimants seeking an even greater rate of return, one life company offers a beneficial feature that can provide added protection and additional income on top of structured settlement payments. Pacific Life developed the ILAPA product, which is a rider tied directly to the performance of the S&P 500. In 2014, the IRS released a Private Letter Ruling confirming the use of the rider. If the S&P rises over a period of 12 months (referred to as “Index Measurement Periods”), the annuity payments will also rise, subject to an annual maximum of 5%. If the S&P declines or remains flat, there will be no impact on the annuity payments. Instead, payments will remain flat for the next 12 months.
A word of caution: There are many other non-traditional financial products posing as structured settlements. The vast majority have not received IRS approval for legal use in conjunction with structured settlements.
#3: No Management Fees
Traditional investments come with traditional costs, such as trading costs, commissions and account fees, and taxation. Structured settlements, on the other hand, do not have any annual fees. When combined with the guaranteed rate of return, the lack of fees allows structured settlements to remain competitive with traditional investments.
#4: No Contribution Limits
If a claimant wants to put money away for retirement and chooses to place settlement funds in an IRA or a Roth IRA, there are limits to the amount that can be deposited annually. Per the IRS, the current total combined annual limit to traditional and Roth IRAs cannot be more than $5500 (under age 50) and $6500 (age 50 or over). In contrast, a structured settlement has no contribution limits and can serve as the bedrock for a diversified retirement investment portfolio.
Contact Traci Kaas to discuss your client’s structured settlement options
An experienced settlement planner can walk your client through all of their settlement options, including structured settlements. For more information, contact Traci Kaas today at 800-354-2258 or firstname.lastname@example.org.
1 Guarantees are subject to the claims-paying abilities of the issuing insurance company.