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Why Structured Settlement Annuities Suck!

A structured settlement annuity locks in a fixed rate for the life of the annuity.  At today’s historically low interest rates, annuities may offer a rate of return as low as half of 1%.  That’s pathetically low and to make things worse, you’re stuck with this low rate and there’s nothing you can do about it.

Structured settlement annuities have another drawback. The structured settlement broker (typically a representative of the liability insurance company) receives 4% of the amount of the annuity. Let’s say your client is forced into an annuity that costs $1 million—the structured settlement broker, a/k/a defense broker, will make $40k from your settlement. Hell, the liability insurer benefits even when they pay a big settlement (and that really sucks!).

Avoid Structured Settlement Annuities

A much better choice is a structured settlement trust that incorporates a laddered bond investment portfolio.  A laddered bond is a bond portfolio consisting of government, municipal and treasury bonds and certificates of deposit with different maturity rates, i.e., one bond maturing in one year, another in three years and others in 5 years.

By staggering the maturity dates of the bonds, the injury victim will not be locked into one particular bond (and an abysmally low fixed rate of interest) for a long duration.  A ladder bond portfolio in a structured settlement trust also gives the injury victim greater access to the funds for emergencies and the risk of a bond default can be spread among many bond issuers.  But most importantly, the injury victim can take advantage of increasing interest rates with short-term bonds that do not lock-in a low rate for more than a year or two.

The Only Exception for Considering a Structured Settlement Annuity

Structured settlement annuities offer one benefit that you can’t find anywhere else: a substandard life expectancy or “rated age”. If the injury victim has a substandard life expectancy, the structured settlement annuity will pay a much higher rate of return than a bond will pay.

Let’s say the injury victim is a four-year old infant with quadriplegia and brain damage.  The annuity issuer (a life insurance company) will review the infant’s medical records and give the infant a “rated age”, i.e., the infant has the same life expectancy of a 70-year old.  In this example, the annuity issuer will pay a much higher rate of return than a bond and in this limited example, it makes sense to use the settlement funds to buy a structured settlement annuity.

Remember, the 4% commission payable to the settlement structured broker is negotiable.  You may be able to cut the commission in half, but even if you can’t, you should always use a structured settlement broker who only represents the interests of injury victims (Brett Newman is a great!). NEVER use a structured settlement broker hired by the insurer—they are only representing the interests of the insurer and they care less about your client.

photo credit: Loan Officer via photopin (license)