As published in Litigation Commentary & Review #2 (October 2009).
When most people hear “structured settlement,” they assume the dollar amount of the injury settlement is for hundreds of thousands of dollars or more. Surprisingly, that’s not always true. Over the past 20 years, more than 50 percent of the structured settlements facilitated by Ringler Associates, the world’s oldest and largest settlement annuity firm, were less than $50,000. Another approximately 17 percent were between $50,000 and $100,000. These figures are typical in most annuity firms.
Large structured settlements for severely injured parties who require ongoing medical care certainly make sense. A steady stream of annuity payments over a long period enables injured parties to enjoy a secure financial future. But, how about smaller amounts with shorter payout periods?
Minors Are Primary Recipients
Minors are the primary recipients of smaller structured settlements. Parents want to ensure that their children are unable to access the funds until they turn 18 or age of majority. The funds can be used to pay for college tuition, as a down payment for a first home or future medical costs. When minors are involved, judges often require that settlements be structured before approval regardless of the settlement amount.
What about adults and small structured settlements? Statistics show that most lump sum payments are spent within five years of payout. This is just as true with a $50,000 settlement as a $5 million settlement. No matter how savvy individuals may think they are with their money, family, friends and others tend to spring up asking for “loans” or with a “can’t miss” investment scheme. As today’s unpredictable financial markets show, even the most conservative investor can lose a sizable nest egg in just a short time.
Structured settlement annuities help smooth out investment ups and downs. The annuity funds are placed in secure, AAA-rated bonds or government-backed securities without ongoing annual management fees. The regular income that even a small annuity brings can be used to supplement money from other sources, pay for everyday living expenses or to see the injured party through until recovery.
Structures for Adults
Structured settlements can offer financial, tax-free flexibility that a lump sum payout cannot. For example, a 42-year-old male chose to receive a $50,000 settlement in five-year increments. At a tax-free 4.65 percent rate of return (5.85 percent taxable equivalent), a payment schedule was devised: $15,000 in 2014, $20,000 in 2019, $20,000 in $2024 and $31,468.41 in 2029. The total tax-free guaranteed payout will be $86,468.41.
That same 42 year old, with a life expectancy of 34.2 years, could have also selected to receive monthly lifetime income beginning at age 55. Obtaining a slightly higher rate of return (4.80 percent tax free/5.90 percent taxable equivalent), his monthly payments would be $525.75 for a total of $158,776.50. If he had chosen to wait until he was age 60 to start receiving payments, he would receive $755.90 per month (4.90 percent rate of return, taxable equivalent yield, 5.85 percent) for a total of $182,927.80.
In the end, the amount of the structured settlement is not as critical as is creating a settlement that meets the needs of the injured party. An annuity, paid over a set number of years offering guaranteed tax-free income, can be an attractive alternative to low interest bearing bank accounts or higher yielding, but riskier investments.
Patrick C. Farber is a structured settlements broker at Ringler Associates in Southern California. He specializes in settling medical malpractice, personal injury, product liability, workers’ compensation, mass torts and construction defect cases with structured settlements in court hearings, arbitrations and settlement conferences.